Transcript
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CHAPTER TWO

TAX AVOIDANCE

2.1 Tax avoidance: Introduction

Tax avoidance is as old as taxation itself;1 but the topic has takenprominence over the last decade, with extensive attention from parliamentand the media.2

The subject impinges on many aspects of this book, but it is best toconsider it as a topic and in a chapter of its own.

2.2 Avoidance/mitigation, evasion

I turn to discuss the complicated, emotionally charged, and in practiceconstantly abused term “tax avoidance.”

2.2.1 Terminology

It is helpful to begin with a fourfold categorisation:(1) Tax evasion: Conduct which constitutes a criminal offence (fraud on

HMRC or similar offences). This normally involves dishonestsubmission of an incorrect tax return. Dishonesty is essential to theoffence.

(2) Honest misdeclaration: The submission of an incorrect tax returnwithout dishonesty. Those involved may be culpable (eg careless) butnot dishonest.

1 For examples from 1798 and 1920, see “Tax Avoidance in 1798”https://www.kessler.co.uk/wp-content/uploads/2013/06/Tax-avoidance-criticism-in-1798.pdf and “Vestey: Royal Commission debate”https://www.kessler.co.uk/wp-content/uploads/2017/11/Vestey_Royal_Commission_debate.pdf.

2 It is interesting to speculate why that has been the case. I think the reasons lie inpolitics and sociology rather than tax law or practice. The Public AccountsCommittee, and some effective pressure groups, have clearly contributed but giventhe pressure on the front page, why has their work received so enthusiastic areception? The 2008 financial crisis and climate of austerity may be a factor.

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2.2 Tax Avoidance

(3) Tax avoidance: Arrangements that reduce tax liability in a mannercontrary to the intention of parliament (I come later to consider thisconcept in more detail).

(4) Tax mitigation: Conduct which reduces tax liabilities without “taxavoidance” (not contrary to the intention of parliament).

The distinctions between these concepts (especially avoidance/evasion andavoidance/mitigation distinctions) are now commonplace. They mayappear obvious. They are taught to every student. No sensible debate ispossible without them. However, the concepts and their terminology haveonly emerged after a gradual process of development and even now theterminology is not always adopted. It is essential to bear this in mind onreading sources on this subject.3

2.2.2 Avoidance/evasion distinction

An avoidance/evasion distinction very similar to the present wasrecognised very early (and was surely self-evident at any time) but at firstthere was no terminology, or at least no commonly agreed terminology, toexpress it. In 1860 Turner LJ suggested evasion/contravention (whereevasion stood for the lawful side of the divide).4 In 1900 the distinctionwas noted as two meanings of the word “evade”.5 It is possible that the

3 eg the 1920 Royal Commission on the Income Tax Cmd. 615 discussed evasion,honest misdeclaration and avoidance in a chapter headed “The Prevention ofEvasion”, in which the words “avoidance” and “evasion” were used quiteindiscriminately, see para 625. It is an interesting question whether the absence ofterminology hampered discussion of the issues or whether the lack of discussion orinterest led to the absence of suitable terminology. I suggest the latter: in the 1920s,criminal prosecution for tax evasion was rare, and only in blatant cases. Thus theavoidance/evasion distinction was not relevant. Likewise, tax avoidance (in themodern sense) was then still in its infancy so the avoidance/mitigation distinction alsohad little relevance.

4 Fisher v Brierly (1860) 1 de G F&J 643 at p.663. It is a pity that this use ofcontravention did not catch on because it is more transparent than evasion.

5 Bullivant v AG [1901] AC 196 at p.207:“The word ‘evade’ is ambiguous. ... there are two ways of construing the word‘evade’: one is, that a person may go to a solicitor and ask him how to keep out ofan Act of Parliament – how to do something which does not bring him within thescope of it. That is evading in one sense, but there is nothing illegal in it. The otheris, when he goes to his solicitor and says, ‘Tell me how to escape from theconsequences of the Act of Parliament, although I am brought within it’. That is anact of quite a different character.”

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Tax Avoidance 2.3

current use of the words avoidance/evasion in the modern sense originatedin the USA where it was established by the 1920s.6 But by 1936, at least,knowledgeable writers in the UK adopted the same terminology, andcastigated those who did not:

In referring to these devices, those who took part in the debates on thenew [ToA] provisions in the House of Commons repeatedly used theword “evasion.” Even the spokesmen of the Government at timesallowed themselves this indulgence. The Financial Secretary to theTreasury (for example) described [s.18 FA 1936, transfer of assets] asa “Clause for the prevention of tax evasion”,7 while the Attorney-General, dealing with the same clause, spoke of “marginal cases inwhich there may be some element other than tax evasion”.8 Privatemembers, and on at least one occasion the Financial Secretary,9 spokeof “guilt” and “innocence” as though the House were discussing thesuppression of crime.There can be no question of any real confusion of thought, but theconfusion of language is none the less to be deprecated. The newprovisions have nothing to do with “evasion”; they are concerned solely

with legal avoidance.10

6 It is found in the scholarly Sears, Minimising Taxes (1922), and can be traced toOliver Wendell Holmes in Bullen v Wisconsin (1916) 240 US 625 at p.630. It isregarded as basic in Hartman, Tax Avoidance (1930) which cites two textbookdefinitions in similar terms. Perhaps the practice of tax avoidance began earlier in theUSA; the first published work on the subject in England was Moore, The Saving ofIncome Tax Surtax and Death Duties (1935), the publication of which lead to theenactment of the ToA provisions.

7 Official Reports, 15th June 1936, col. 676.8 Ibid. col. 704.9 Ibid. vol. 692.10 Stein & Marks, Tax avoidance: An interpretation of the provisions of the Finance

Act, 1936, relating to transfers of assets, companies’ sur-tax, children’s settlements(1936) p.1. Jacques Stein (1887–1973) was a significant figure in his day, and aforemost expert on taxation, according tohttp://www.encyclopedia.com/religion/encyclopedias-almanacs-transcripts-and-maps/stein-leonard. Similarly, the 1955 Royal Commission Cmd. 9474 para 1016:

“It is usual to draw a distinction between tax avoidance and tax evasion. The latterdenotes all those activities which are responsible for a person not paying the tax thatthe existing law charges upon his income. Ex hypothesi he is in the wrong, thoughhis wrongdoing may range from the making of a deliberately fraudulent return to amere failure to make his return or to pay his tax at the proper time. By taxavoidance, on the other hand, is understood some act by which a person so arranges

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2.4 Tax Avoidance

The distinction is accepted internationally:

72. The terms “tax evasion” and “tax avoidance” have not always beenused precisely or with a uniform meaning. Strictly speaking, tax evasionis considered to consist of wilful and conscious non-compliance with thelaws of a taxing jurisdiction. Tax evasion is an action by which ataxpayer tries to escape legal obligations by fraudulent or other illegalmeans. The illegal conduct might involve simply failing to reportincome or fabricating deductions, or it may involve highly sophisticatedtax planning that is premised on false or intentionally deceptiverepresentations to the tax authorities. ...11

73. Tax avoidance, in contrast, involves the attempt to reduce the amountof taxes otherwise owed by employing legal means. However, theborderline between evasion and avoidance in specific cases may bedifficult to define. For one thing, the criminal laws of countries differ,so that behaviour that is criminal under the laws of one country may notbe criminal under the laws of another. In addition, the definitions ofcivil and criminal tax fraud may overlap, so that it is withinadministrative discretion whether or not to pursue a criminal fraud casein a specific instance. In reality, there is a continuum of behaviour,ranging from criminal fraud on one extreme, to civil fraud, to taxavoidance that is not fraudulent but which runs afoul of judicial orstatutory anti-avoidance rules and therefore does not succeed inminimizing tax according to law, and finally to tax-planning behaviour

which is successful in legal tax reduction. ...12

his affairs that he is liable to pay less tax than he would have paid but for thearrangement. Thus the situation which he brings about is one in which he is legallyin the right, except so far as some special rule may be introduced that puts him in thewrong.”

Note that “evasion” is used here (unlike present usage) to describe dishonest criminalevasion and honest mis-declaration. Lord Templeman used this (by then old-fashioned) terminology in IRC v Challenge Corporation [1986] STC 548: “Taxevasion occurs when the commissioner is not informed of all the facts relevant to anassessment of tax. Innocent evasion may lead to a re-assessment. Fraudulent evasionmay lead to a criminal prosecution as well as re-assessment.” It does aid clarity if theterm “evasion” is restricted to what Lord Templeman terms “fraudulent evasion”.

11 The text muddies the waters here by adding: “In a broader sense, tax evasion mayencompass a reckless or negligent failure to pay taxes legally due, even if there is nodeliberate concealment of income or relevant information.” But this is not commonusage, and is better regarded as incorrect usage.

12 United Nations Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries) 2016 (footnotes omitted).

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Tax Avoidance 2.5

Avoidance/evasion distinctions are found outside tax, though theterminology may differ. Accountants for instance distinguish “creativeaccounting” (also known as aggressive accounting), which is legal; andaccounting fraud, which is criminal.13

A discussion of criminal evasion is outside the scope of this book.

2.2.3 Avoidance/evasion terms misused

There are three contexts where the reader will see evasion/avoidanceterminology misused (evasion being used for avoidance or vice versa).

The first is historical: in law reports and elsewhere, at least up to the1970s.14 It took a long time for the current usage to become fullyestablished.

The second context is in the writing of those not knowledgeable about

13 See Jones (ed) Creative Accounting, Fraud and International Accounting Scandals(2011).

14 Examples include: Coutts v IRC [1964] 1 AC 1393 at p.1420; Jamieson v IRC (1963)41 TC 43 at p.70; Cory v IRC [1965] AC 1088 at p.1107; Greenberg v IRC (1971)47 TC 240 at p.271: “Parliament attempted to prevent this and other methods of taxevasion by provisions in the FA 1960”. This usage seems to have stopped in the1970s; at this time UK economists were giving increasing attention to the subject oftax avoidance and evasion (Tax Avoision, p.1, IEA 1979) and perhaps their work hadan effect on legal usage. Note that this is purely a semantic and not a substantivepoint that is being made here. The old usage certainly does not reflect the view thatthe evasion/avoidance distinction is unreal or unclear or that one can shade into theother. The legal distinction between the two is tolerably clear since evasion involvesdishonesty, a tolerably well defined and understood concept. The term “avoision”used in the IEA publication referred to was coined as a convenient term to meanavoidance/evasion. The book noted the lack of economic distinction between the twoconcepts; the economic similarity was the justification for the new coinage. (Thebook also noted the blurring of a moral distinction between the two concepts eitherbecause avoidance was seen by some as immoral or because evasion was seen bysome as not immoral; the book did not suggest a lack of a legal distinction which wasunquestioned then and still should be now.)

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2.6 Tax Avoidance

tax, including lawyers15 (non-tax lawyers) and politicians.16 When writingfor non-tax lawyers, it may be helpful to use the expressions “legalavoidance”17 and “illegal evasion”, to make the meaning clearer.

Thirdly, the distinction may be deliberately muddled for polemical effect:

in practice tax evasion and avoidance are too often conflated ... Forexample, users of disguised remuneration schemes were troubled whenthe schemes were called “illegal” by the Chancellor of the Exchequerand the Financial Secretary to the Treasury. HMRC has not claimed thatthese schemes are illegal; rather that they are not effective, ... inreducing an individual’s tax liabilities.18

It is sometimes hard to tell whether the misuse is deliberate or accidental.

2.3 Politics of tax avoidance

The topic is political, so I begin with a politician (David Cameron):

Of course there is a difference between tax evasion and tax avoidance.Evasion is illegal. It can and should be subject to the full force of thecriminal law. But what about tax avoidance? Now of course there’s nothing wrongwith sensible tax planning and there are some things that governmentswant people to do that reduce tax bills, such as investing in a pension,

15 For example, see R v Charlton [1996] STC 1418 at p.1421. The avoidance/evasion distinction in UK terminology is not adopted in EU law,which has a distinct technical terminology: see 75.3 (EU-law terminology); 75.15.2(Abuse/avoidance/evasion: Terminology).Similarly, s.482 United States Internal Revenue Code refers to allocation of incomethat “is necessary to prevent evasion of taxes” but the intended concept is one ofavoidance.

16 Eg The Progress Tackle Tax Avoidance Charter: “HMRC HAS GOT TO GET AGRIP … 4. Get tough on tax avoiders by mounting more prosecutions.” Seehttp://www.progressonline.org.uk/campaigns/tackle-tax-avoidance

17 “Legal avoidance” is a standard term in recent double tax conventions. 18 House of Lords Economic Affairs Committee “HMRC: Treating Taxpayers Fairly”

(2018) para 23, 24.https://publications.parliament.uk/pa/ld201719/ldselect/ldeconaf/242/242.pdfThe report recommended “Clearer distinctions are needed in the Government’sapproach and rhetoric towards tax avoidance.” But the Government rejected therecommendation, so this debate will continue: HMRC, “The Powers of HMRC:Treating Taxpayers Fairly (House of Lords Paper 242) Government Response” p.2https://www.parliament.uk/documents/lords-committees/economic-affairs/Govt%20HMRC%20Powers%20report%2022%20Jan%202019%20.pdf

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Tax Avoidance 2.7

a start up business or giving money to a charity. But there are someforms of avoidance that have become so aggressive that I think it is rightto say these raise ethical issues, and it is time to call for moreresponsibility and for governments to act accordingly.In the UK we’ve already committed hundreds of millions (?) into thiseffort, but acting alone has its limits. Clamp down in one country andthe travelling caravan of lawyers, accountants and financial gurus willjust move on elsewhere. ...I believe in low taxes, that is why my government is cutting the top rateof income tax, we’ve cut corporation tax. [Delete - political].19

Individuals and businesses must pay their fair share. And businesseswho think they can carry on dodging that fair share, or that they cankeep on selling to the UK and setting up ever more complex taxarrangements abroad to squeeze their tax bills right down, well theyneed to wake up and smell the coffee, because the public who buy fromthem have had enough.20

All the main tropes of the political debate are in this passage:(1) Everyone should pay a “fair share” of tax.(2) Some taxpayers fail to do so due to tax avoidance.(3) Tax avoidance is unethical, immoral or anti-social.(4) Acknowledgement of the avoidance/evasion distinction;21 but it does

not contradict point (3). In the words of Margaret Hodge: “We’re notaccusing you of being illegal, we’re accusing you of being immoral.”

(5) Disparaging references to tax advisers.22

On the political left, the same points are made, but more stridently, and,of course, without Cameron’s approval of low taxes.

2.4 Need for analysis

This chapter draws on a paper published by the Oxford University Centrefor Business Taxation, (the “OUCBT paper”).23 The OUCBT paper says:

19 This side note is included in the version of the speech published online; one wonderswhat happened when the speech was delivered.

20 David Cameron speech to World Economic Forum in Davos, 2013https://www.gov.uk/government/speeches/prime-minister-david-camerons-speech-to-the-world-economic-forum-in-davos

21 I suspect newspaper libel readers (rightly) insert this if a journalist overlooks it. 22 This feeds on a very ancient trope concerning lawyers.23 “Tax avoidance” (2012)

http://eureka.sbs.ox.ac.uk/4428/2/TA_3_12_12.pdf(I omit some footnotes here).

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2.8 Tax Avoidance

The question is how to tackle the problems. This requires a clearanalysis of their cause and differentiation between different causes. Labelling a whole range of quite different behaviours as “avoidance”

without further differentiation is unhelpful. ...

Differentiation requires terminology. As there is no agreed terminology,it is best not to use any terms at all without some explanation of what ismeant.

2.4.1 Categorisation of avoidance

If one is to identify the correct response to the problems of avoidance, onemust distinguish:(1) Ineffective avoidance (no tax saving if the law is correctly applied)(2) Effective avoidance (tax saved by avoidance)(3) Non-avoidance (little tax paid but not due to avoidance)24

These are important distinctions because:(1) Ineffective avoidance may be countered by enforcement of the law.(2) Effective avoidance can only be countered by changes in tax law.(3) In cases of non-avoidance:

(a) It may be no change in tax law is appropriate.25

(b) If change is needed, the change is one of policy as well as of taxlaw; and the matter should be considered without the haste andmoral outrage that effective avoidance tends to cause.

If one wishes to assess emotional and moral responses to avoidance, andactual or theoretical anti-avoidance rules, we need further vocabulary todiscuss the range of tax-motivated behaviour.

We might cover the terrain in four categories:26

Uncontroversial tax planning Taking advantage of a tax relief in a

24 The OUCBT paper adopts the somewhat unhelpful labels “categories A, B, and C”. It is difficult to find short labels which neatly sum up the concepts: “Ineffectiveavoidance” is not ideal as this is not really “avoidance” at all.

25 It may be that a change in public expectation or knowledge is desirable.26 There are many ways to slice this cake. Lord Walker proposed seven types of tax

avoidance (a riff on Empson’s Seven Types of Ambiguity): “Ramsay 25 years on”[2004] LQR 120. Contrast Barnett, “A baker’s dozen” Taxation Magazine, 2 August2012. But one must resist the temptation to taxonomy for its own sake. Classificationis (or should be) purposive: a useful taxonomy must draw useful distinctions: it shouldidentify categories which call for different responses, and only those.

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Tax Avoidance 2.9

manner everyone would accept as reasonable and indeed desirable. As thisis at the bottom of the spectrum, it is easy to find clear examples: forinstance, pension contributions, and moderate27 charity giving.28 This isso even if, as is usually the case, care is needed in order to use or tomaximise the relief, for instance, limiting contributions each year tobelow the cap for the relief, or limiting benefits within the permitted limitsfor gift aid.

Ordinary tax planning Using tax legislation in a way which somepoliticians and commentators do not like, but where the planning isordinary in the sense that many people have done and continue to do it; itis obvious and foreseeable; the point probably came to the mind of thoseresponsible for the legislation, or should have done, or there is no reasonto think that parliament would have done anything different if it hadconsidered the point. Ordinary tax planning is not contrary to the“intention of parliament” as that construct is normally understood.

Examples are: (1) Advancing or delaying

(a) disposals for CGT purposes or (b) payment of income (eg by dividends or bonus) (c) pension contributions for IT purposes in anticipation of changes of rates or going non-resident

(2) Transfer of family assets or business to a spouse to equalise income(3) Transfer to a company to reduce tax rates(4) Lifetime giving to avoid IHT(5) Going non-resident

The term “tax mitigation” could be used to cover uncontroversial taxplanning and ordinary tax planning.

Tax avoidance Something legal but contrary to the intention ofparliament in the sense that had parliament thought about it, it wouldprobably prevent the tax advantage. Examples are likely to have beencounteracted by subsequent legislation (though it may be a matter ofjudgement whether the legislation is to stop avoidance or reflects a changein policy. Examples are:

27 In the debate on the Budget 2012, some said that giving more than £50k or 25% ofincome was excessive.

28 These are the examples which Cameron called “sensible tax planning” in the quoteat the start of this chapter.

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2.10 Tax Avoidance

(1) Transfer of assets abroad (counteracted by ToA code)(2) The scheme in Furniss v Dawson (counteracted by s.137 TCGA)(3) Temporary non-residence (counteracted by TNR rules); but one might

place that at the upper reaches of the ordinary tax planning spectrum

Tax abuse Tax avoidance with aggravating features (typically,self-cancelling steps) that make it (more) unreasonable.29 As this is at thetop of the spectrum, it is easy to find clear examples: take the schemes in:Ramsay, Fitzwilliam, Astall, Mayes, UBS.

Thus this terminology raises three distinctions:(1) Uncontroversial/ordinary tax planning(2) Tax planning/avoidance(3) Tax avoidance/abuse

Before considering whether these distinctions have, or should have,different consequences, it is important to note three difficulties which theyentail:(1) Demarcation problems Except at the extreme ends of the spectrum,

the demarcation problem is intractable: the classification of specificexamples (if it actually had to be decided) would give rise to endlessdisagreement (and has done so in the context of tax motive defences). There are two reasons for this:(a) The distinctions rely on:

(i) imponderable hypothetical questions (what would parliamenthave done if it had noticed the issue?)

(ii) vague constructs (“intention of parliament” and “spirit of thelegislation”)

(iii) identifying tax policy (there may be no clear policy, or it mayfluctuate)

(b) The four distinct categories attempt to impose an order on taxmotivated behaviour which exhibits a scale of unreasonableness,without distinct divisions. It might be better to mark out a slidingscale from 1 to 10, recognising finer distinctions, but that would

29 The epithet commonly used is “egregious” or “aggressive”. That does not clarifyanything but it neatly expresses the point. For completeness: In technical EU-law terminology the term “abuse” is used in adifferent sense; see 75.15.2 (Abuse/avoidance/evasion: Terminology); similarly inOECD discussion; see 72.6 (OECD-concept abuse). However we are not concernedwith that usage here.

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Tax Avoidance 2.11

not help for practical purposes. It is often the case that experienceis a continuum on which the law seeks to impose bipolarcategories, but the difficulty in doing so here is greater than usualbecause the distinction is more imponderable.

(2) Tax-law knowledge problems Except for the extreme ends of thespectrum, (a small part of the field) a serious discussion of where anyparticular arrangement should be classified, or graded, can only becarried out by someone who understands the tax background. Fewnon-practitioners have much understanding. Journalists in the UK donot arrange for their work to be reviewed by someone whounderstands tax. Politicians are characterised by grandstanding andsoundbites. Pressure groups grind their axes. The details, importantto those within the profession, are likely to bore or bewilder mostpeople outside it.

(3) Factual knowledge problems If discussing particular instancies, oneneeds to know the facts, which are not usually in the public domain.

2.4.2 Why distinctions matter

The distinctions I have drawn are not entirely satisfactory, but it is hard tothink of better.

The ordinary tax planning/tax avoidance dividing line is established intax law at least since Willoughby (1997). It marks the point where: (1) Tax motive provisions begin to bite(2) Extra-statutory concessions cease to apply(3) HMRC Manuals cease to bind HMRC30

For this distinction, see 38.15 (Avoidance/mitigation distinction) to 38.48(Tax avoidance: Critique).

The tax avoidance/tax abuse distinction was established in 2013: it marksthe point at which the GAAR is intended31 to bite:

30 HMRC Guidance Manuals introduction: “Subject to [limited specified] qualificationsreaders may assume the [HMRC Manual] guidance applies in the normal case; butwhere HMRC considers that there is, or may have been, avoidance of tax theguidance will not necessarily apply.”http://www.hmrc.gov.uk/manuals/advisory.htm

31 The statutory definition (perhaps unavoidably) allows some scope for mission creep.Section 207(2) FA 2013 provides for the purposes of the GAAR:

“Tax arrangements are “abusive” if they ... cannot reasonably be regarded as areasonable course of action...”.

It is significant that the GAAR is called a general anti-abuse rule, not a general anti-

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2.12 Tax Avoidance

The Government agrees with the Report’s recommendation to introducea rule which is targeted at artificial and abusive arrangements (those thatthe Report refers to as “egregious”, “very aggressive” or “highly abusivecontrived and artificial”). It accepts the Report’s conclusion thatintroducing a “broad spectrum” general anti-avoidance rule would notbe beneficial for the UK tax system. ... the GAAR should not affectwhat the Report describes as “the centre ground of tax planning”.32

There has not been much judicial discussion (the issue has not arisen fordecision) but a passage in Furniss v Dawson recognises something like atax avoidance/abuse distinction:

The scheme [in Furniss] has none of the extravagances of certain taxavoidance schemes which have recently engaged the attention of thecourts, where the taxpayer who has been fortunate enough to realise acapital profit has gone out into the street and, with the aid of astuteadvisers, manufactured out of a string of artificial transactions asupposed loss in order to counteract the profit which he has alreadymade. The scheme before your Lordships is a simple and honest schemewhich merely seeks to defer payment of tax until the taxpayer hasreceived into his hands the gain which he has made.33

The uncontroversial/ordinary tax planning distinction is not relevant in taxlaw, but it is relevant to the public debate on morality.

2.5 Tax avoidance and morality

2.5.1 Morality and taxation

This is intended to be a practical work. The relationship between moralityand law (or tax-morality and tax law) is another book. But attitudes to the(im)morality of tax avoidance do have practical consequences for tax: itaffects judicial attitudes and decisions; it was a driver for the enactmentof the GAAR and will play an important role in its interpretation.

The topic of the relationship between morality and taxation should beseen as part of a wider discussion of the relationship between morality andlaw. Without entering into these deep waters, it should generally beaccepted that not everything which is immoral should be proscribed by

avoidance rule. The extent to which HMRC or the Courts will focus the GAAR onthis target remains to be seen. See 23.6.7 (Sale of company: GAARable?)

32 HMRC consultation document “A General Anti-Abuse Rule” (2012) para 2.1.33 [1984] AC 474 at p.518.

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Tax Avoidance 2.13

law.

2.5.2 Judicial view in the past

Older cases uniformly regard tax avoidance as morally neutral. In 1900:

Bundey J. recognises to the full both the legal and the moral right ofevery man to dispose of his property if he can in a way which does notexpose it to be taxed under the existing system of taxation.34

In 1922:

it is perfectly open for persons to evade35 this particular tax if they cando so legally. I again say I do not use the word “evade” with anydishonourable suggestion about it. If certain documents are drawn up,and the result of those documents is that persons are not liable to aparticular duty, so much the better for them.36

In 1926:

the highest authorities have always recognised that the subject is entitledso to arrange his affairs as not to attract taxes imposed by the Crown, sofar as he can do so within the law, and that he may legitimately claimthe advantage of any express terms or of any omissions that he can findin his favour in taxing Acts. In so doing, he neither comes under liabilitynor incurs blame.37

During the second world war, judicial opinion changed:

of recent years much ingenuity has been expended in certain quarters inattempting to devise methods of disposition of income by which thosewho were prepared to adopt them might enjoy the benefits of residencein this country while receiving the equivalent of such income, withoutsharing in the appropriate burden of British taxation. Judicial dicta maybe cited which point out that, however elaborate and artificial suchmethods may be, those who adopt them are “entitled” to do so. There is,of course, no doubt that they are within their legal rights, but that is noreason why their efforts, or those of the professional gentlemen whoassist them in the matter, should be regarded as a commendable exercise

34 Simms v Registrar of Probates [1900] AC 323 at p.333.35 Nowadays one would use the word “avoid” here; but the modern terminology had not

developed at this point; see 2.2.2 (Avoidance/evasion distinction).36 Hawker v Compton 8 TC 306 at p.30. 37 IRC v Fisher's Executors 10 TC 302 at p.340. If yet another example is needed,

which I doubt, see Levene v IRC 13 TC 486 at p.501-502.

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2.14 Tax Avoidance

of ingenuity or as a discharge of the duties of good citizenship. On thecontrary, one result of such methods, if they succeed, is, of course, toincrease pro tanto the load of tax on the shoulders of the great body ofgood citizens who do not desire, or do not know how, to adopt thesemanoeuvres.38

And again:

The [ToA] Section39 is a penal one and its consequences whatever theymay be, are intended to be an effective deterrent which will put a stopto practices which the Legislature considers to be against the publicinterest. For years a battle of manoeuvre has been waged between theLegislature and those who are minded to throw the burden of taxationoff their own shoulders on to those of their fellow subjects. In that battlethe Legislature has often been worsted by the skill, determination andresourcefulness of its opponents ... It would not shock us in the least tofind that the Legislature has determined to put an end to the struggle byimposing the severest of penalties. It scarcely lies in the mouth of thetaxpayer who plays with fire to complain of burnt fingers.40

Howard de Walden expresses an ethos which (along with the militarymetaphor) should be attributable to the wartime background; “as we areat war, the ordinary mode of construing legislation has been suspended”.41

After the war, the old orthodoxy returned. In 1965:

The fact that a settlement is drawn with a view to avoiding particularcharging provisions is neither reprehensible, nor a proper ground forinclination to a conclusion that it ought to come within those or someother charging provisions. ... If any moral criticism could be levelled atthem, then the consciences of the judges of the Chancery Division, in theexercise of their discretionary jurisdiction under the Variation of TrustsAct 1958, would be in a sorry state.42

Lord Diplock expressed the traditional view in 1964:

Tax law no more lies within the field of morals than does a crosswordpuzzle.43

38 Latilla v IRC 25 TC 107 at p. 117.39 See 34.2 (Construction of ToA provisions).40 Howard de Walden v IRC 25 TC 121at p.124.41 Darling J, cited in Foxton, “R v Halliday in Retrospect” [2003] LQR 455.42 Re Kirkwood [1965] Ch 286 at p.327.43 Diplock, “The Courts as Legislators” Address to The Holdsworth Club (1965)

https://www.kessler.co.uk/wp-content/uploads/2012/05/CourtsAsLegistlators.pdf.

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Likewise in 1982:

the fact that the purpose of the scheme was tax avoidance does not carryany implication that it was in any way reprehensible or other thanperfectly honest and respectable.44

Without attempting a full survey, which would require a team of experts,it appears that the same view was held throughout the common law world. In America in 1947:

Over and over again courts have said that there is nothing sinister in soarranging one's affairs as to keep taxes as low as possible. Everybodydoes so, rich or poor; and all do right, for nobody owes any public dutyto pay more than the law demands: taxes are enforced exactions, notvoluntary contributions. To demand more in the name of morals is merecant.45

Oliver Wendell Holmes is often quoted for his extra-judicial comment “Ilike to pay taxes. With them I buy civilization.”46 But those who quotethat tend to quote selectively. The same judge said:

The only purpose of the vendor here was to escape taxation... The factthat it is desired to evade the law, as it is called, is immaterial, becausethe very meaning of a line in the law is that you may intentionally go asclose to it is you can if you do not pass it.47

In Australia in 1995:

The obligation to pay [income tax] is a legal one. Some politicians tryto treat it as a moral obligation. But it is not. The citizen is bound to payno more tax than the statute requires him to pay according to therelevant state of his affairs.Consistently with this view, it has long been a principle of the law ofincome taxation that the citizen may so arrange his affairs as to renderhim less liable to pay tax than would be the case if his affairs were cast

44 IRC v Burmah Oil 54 TC 200 at p.220; followed in 1988 in Craven v White 62 TC1 at p.196.

45 Commissioner v Newman, 159 F2d 848 (1947). The case concerned the taxation ofsettlor-interested trusts.

46 In Ensign Tankers v Stokes [1992] STC 226 at p.235 the apophthegm is paraphrased,with, perhaps, a change of nuance: “taxation is the price which we pay forcivilisation.”

47 Superior Oil Co v. Mississippi 280 US 390.

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2.16 Tax Avoidance

in some different form. .. This is sometimes expressed as a right to avoidtax.48

2.5.3 Pro-avoidance rationale

The following points can be made in favour of the traditional view, thattax avoidance is morally neutral:

(1) Difficulties of “right” amount of taxThe tax system is full of anomalies, artificial, arbitrary, and not based onany consistent principles. One might say there is generally no “right”amount of tax except in the sense of what is due by statute.

(2) Difficulty of applying moral principles This is perhaps another way of putting point (1): The view that taxation isgoverned by moral principles distinct from the rules of black letter tax laweither:(a) requires one to enter into the intractable distinction of tax

avoidance/abuse; or (b) spreads the net very wide, far wider than any practitioner is likely to

accept (and still requires one to enter into the intractable distinctionof uncontroversial/ordinary tax planning).

In practice, public debate does not engage with black letter tax law and itis difficult to envisage that it ever would or could. Ethics is a practicalsubject. It only works if the entities called “right” and “wrong” arereasonably distinguishable and of a more or less permanent nature. Ifstandards are so vague, or so difficult to apply in actual cases, that wecannot see how we could act on them, we become sceptical. That suggeststhat morality has little if any role to play.

(3) Egregious over-taxationI coin the expression “egregious over-taxation” to refer to situationswhere HMRC take advantage of anomalies in their favour in a mannerwhich is unfair and contrary to the intention of Parliament (as thatexpression is understood in a tax avoidance context). It is the opposite oftax avoidance. Three distinct sub-issues arise here:(a) Does egregious over-taxation arise in practice(b) Is it proper for HMRC to seek egregious over-taxation

48 Sir Garfield Barwick (Chief Justice of Australia 1964–81), A Radical Tory (1995) atp.229.

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(c) What light does that shed on the issue of tax avoidance morality

Issue (a) is a question of fact, to which the short answer is, yes. Of coursethe Courts generally try to construe statutes to prevent egregious over-taxation, just as they try to prevent avoidance; but sometimes they do notachieve this. For instance, the unfortunate Mr Lobler fell into the trap ofa partial surrender of life policies:

He made no profit or gain as that term is commonly or commerciallyunderstood and yet he becomes liable to pay tax which exhausts his lifesavings and may bankrupt him. That is an outrageously unfair result.... This is legislation which does not seek to tax real or commercial gains.Thus it makes no sense to say that the legislation must be construed toapply to transactions by reference to their commercial substance….Nooverriding principle can be extracted from the legislation....Thus with heavy hearts we dismiss the appeal.49

There are then four possible moral approaches:

View Tax avoidance Egregious over-taxation1 Wrong Right2 Right Wrong3 Wrong Wrong4 Right Right

One might perhaps adopt view 1, that tax avoidance is wrong butegregious over-taxation is right, in short, fairness should apply in favourof HMRC but not the taxpayer; but no-one has had the temerity toadvocate that.

One might perhaps adopt view 2, that tax avoidance is right, but HMRCshould be bound by a further requirement of fairness; but few if anyadvocate that either.

So if sauce for the goose is sauce for the gander, we are limited to views3 or 4.

49 Lobler v HMRC [2013] UKFTT 141 (TC). In order to avoid the unfairness the UpperTribunal allowed the appeal, though it had to rewrite the law of rectification aspreviously understood in order to do so; see [2015] UKUT 152 (TCC). The law waslater amended; See 41.3.5 (Partial surrender trap). But that does not affect the pointbeing made here. For another example, see Hunters Property v HMRC [2018] UKFTT 96 (TC), whereEIS relief was unfairly lost, because a group company was member of a guaranteecompany which was “merely a vehicle for holding client funds and had no intrinsicvalue of its own”.

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View 3 is possible, but it is not supported by HMRC. Those whosupport the view that tax should be governed by rules rather thandiscretion also cannot logically criticise HMRC for seeking egregiousover-taxation, where the law requires, though can criticise them for notseeking to change the law promptly after unfairness has been identified(and, if appropriate, publish an ESC to operate in the meantime).

So we fall back on view 4, thus this consideration supports the view thatthere is nothing wrong in avoidance.50

One might wish that HMRC were as concerned about egregious over-taxation as they are about its flipside, avoidance, (egregious or otherwise). Of course, egregious over-taxation is different in that it brings in revenuerather than losing it; however, in addition to the unfairness for its victims,it has an intangible cost in that it brings the UK tax system into disrepute. But there it is.

(4) Tax avoidance sometimes leads to fair resultsThis relates to point (3): There are cases where tax avoidance avoidsegregious over-taxation. An example is the use of multiple policies toavoid the tax trap of partial surrender.51

Parliament sometimes admits this, by enacting a new relief to allowdirectly what had previously been achieved by avoidance. Examples are:(a) Nil rate band discretionary trusts, which allowed transferable nil rate

bands before the IHT relief was enacted in 2007.(b) CGT group relief to obtain loss relief. A company about to realise a

gain on an asset would formerly transfer it to a group company thathad realised an allowable loss. Alternatively, a company which hadrealised a gain might acquire from a group company an asset whichwas to be sold at a loss. That would allow the loss to be set againstthe gain before the introduction of the election to allocate gains andlosses around a group, in 2009.52

Offshore trusts mitigate the economically deleterious lock-in effect ofCGT by deferring tax until gains are received.

Tax avoidance (if it be such) sometimes permits a business to continue

50 For an example of this line of reasoning in use, see the Ayrshire Pullman quotebelow.

51 See 41.3.5 (Partial surrender trap).52 Section 171A TCGA.

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which would otherwise be destroyed by taxation.53

Related to this is the use of tax avoidance for political/economic ends. High tax rates may be mitigated by avoidance, achieving a pragmaticcompromise between incompatible political viewpoints, or allowing apublic perception which is different from the reality. IFS say:54

... in principle, it would be efficient to tax relatively mobile activities ata lower rate in order to avoid deterring mobile activities while allowinga higher rate to be supported on less mobile activities.55 Avoidancebehaviours are one way that de facto lower rates on more mobile incomeare achieved. ... In this case, there may even be benefits to the UK fromavoidance opportunities if the lower tax rates achieved on mobileactivities – for example, through profit shifting – mean that more realactivity is in the UK than would otherwise be the case.56

This fudge has its costs, including the inefficiencies that arise from taxplanning, fiscal instability and public cynicism; but it happens.

2.5.4 Practitioner/judicial views today

The above sets out a powerful intellectual case in favour of the view thatavoidance, like Lord Diplock’s crossword, is morally neutral. It wasformerly generally accepted, and has never been refuted. But theargument has been found less convincing, or unconvincing, I think for tworeasons:(1) The traditional view was formed in earlier times when there was tax

avoidance but little (if any) activity in the category of tax abuse. When that changed, I think in the 1970’s, the view became farreaching, and so might be regarded more skeptically.

(2) The argument requires an understanding of the tax system as itactually is. Politicians and other non-tax practitioners entered into thedebate without that knowledge.

Whatever the reason, the argument has become perceived as less cogent. By 2007:

53 For an example, see Fisher v HMRC [2014] UKFTT 805 (TC).54 IFS, Green Budget 2013 p.290 http://www.ifs.org.uk/budgets/gb2013/gb2013.pdf55 Footnote original: See Mirrlees et al., Tax by Design: The Mirrlees Review (2011)

https://www.ifs.org.uk/publications/5353 at p.12.56 Footnote original: There is an academic literature on the costs and possible benefits

of tax planning. See for example, D. Dharmapala, “What problems and opportunitiesare created by tax havens?”, Oxford Review of Economic Policy, 2008, 24, 661–79.

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For many directors, the objection to arrangements that are in their view‘too’ artificial may be framed largely in terms of business ethics. Otherdirectors, equally determined to behave in an ethical way, may considerthat the degree of artificiality is not an ethical issue provided no attemptis made to misrepresent the facts or to hide them from the taxauthorities....At one time such a view would perhaps have been more widely heldthan now. At the present time it represents one end of a range of viewsin a debate where probably most commentators would hold that withinthe compass of what is legal there is some behaviour that is acceptableand some that is not...57

In 2011, Aaronson’s GAAR study reported the views of taxpayerrepresentative bodies:

There was unanimous disapproval, indeed distaste, for egregious taxavoidance schemes.58

Of course tax practitioners do not all share the same view. But I think itis the case that they are mostly drawn to the view that opprobrium shouldonly attach at the top end of the scale, in cases of tax abuse, in which casethe GAAR has more or less rendered the issue academic; or if anyopprobrium attaches to tax motivated behaviours lower down the scale,the amount of opprobrium should vary according to the scale.

This might be consistent with Lord Templeman’s views in tax abusecases, which were expressed trenchantly (some would say, stridently59):

In common with my predecessors I regard tax-avoidance schemes of thekind invented and implemented in the present case as no better thanattempts to cheat the Revenue.60

57 David Williams “Developing the Concept of Tax Governance” (February 2007) http://webcache.googleusercontent.com/search?q=cache:gn5Xu4GPUIMJ:www.ibrarian.net/navon/paper/Tax_and_Corporate_Social_Responsibility.pdf%3Fpaperid%3D8404118+&cd=7&hl=en&ct=clnk&gl=uk

58 Aaronson, GAAR Study (2011) http://webarchive.nationalarchives.gov.uk/20130321041222/http:/www.hm-treasury.gov.uk/d/gaar_final_report_111111.pdf.

59 Lord Neuberger referred more tactfully to Lord Templeman’s “characteristicallycolourful language”; R oao Evans v Attorney General [2015] UKSC 21 at [53].

60 IRC v Fitzwilliam 67 TC 614 at p.756. Lord Templeman’s claim that his attitude isheld in common with his predecessors is untenable. But it is held in common with hissuccessors.

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This may be consistent with recent comments of the Supreme Court. In2014:

Since the seminal decision of the House of Lords in Ramsay v IRC61

there has been an increasingly strong and general recognition thatartificial tax avoidance is a social evil which puts an unfair burden onthe shoulders of those who do not adopt such measures.62

“Social evil” represents the top end of judicial rhetoric in recent times;63

though the scope of the critique also depends on the word “artificial”,which may mean little or much.64

And again in 2015, but more moderately expressed:

[Tax avoidance] gives rise to social costs which are significant andincreasingly controversial.65

There is no current judicial unanimity, and the pendulum may swingerratically. In a rating avoidance case in 2019:

Views may differ as to whether the purpose for which the SPVs wereused was socially reprehensible.66

2.5.5 Avoidance: Discretionary remedies

In Altus Group v Baker Tilly negligent accountants argued it was contrary topublic policy to award damages for their failure to advise or implement anavoidance scheme. The argument was summarily rejected.67

Where courts grant discretionary remedies, the question arises whether a taxavoidance scheme context is a reason to refuse the remedy. Examples ofdiscretionary remedies include: setting aside a gift for mistake, rectification,applications under the Variation of Trusts Act 1958, and remedies for unfairprejudice to minority shareholders.

Estera Trust (Jersey) v Singh was an unfair prejudice case. The minorityshareholder was a non-resident trust. The Court ordered the company (“thedefendant co”) to purchase the trust shares. Unfortunately that would be adistribution for tax purposes, and subject to IT at the dividend trust rate. The

61 54 TC 101.62 Futter v HMRC 81 TC 912 Supreme Court at [135] (emphasis added).63 Though “social evil” differs from evil as “social justice” differs from justice.64 Nourse v Heritage Trustees (15th January 2015) at [15] and [71] accessible

www.kessler.co.uk.65 Pendragon v HMRC [2015] STC 1825 at [5].66 See 77.16.4 (Companies: Situs planning).67 [2015] STC 788 at [59](3) and [65].

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trust proposed a different arrangement:(1) The trust transferred the shares to a newly created company wholly owned

by the trust (“Newco”)(2) The defendant co purchased its shares from Newco

This would avoid the IT charge.68 The Court refused to order this arrangementfor a variety of reasons, but one of them was that:

the scheme ... could be regarded as aggressive tax avoidance, eventhough relatively unsophisticated in comparison with other notifiedavoidance schemes. The Court should not without very good reasonorder reluctant parties to enter into a scheme that could be held to beimproper (in the sense that I have identified).69

A tax practitioner may be surprised that this simple arrangement could beregarded as “aggressive”; for as the Court acknowledged, it is “perfectlycommon” for Jersey trusts to own companies that hold trust assets. Butpractitioners should remember that these issues are not decided by taxpractitioners.

In Guernsey, an ill-advised gift to an EBT was set aside for mistake. Thefact that the individual was seeking to avoid UK tax was not a reason forthe Guernsey Court to refuse relief.70 But UK tax avoidance may beregarded with less hostility in foreign jurisdictions, and especially in taxhaven jurisdictions. Foreign courts may also be more sympathetic thanUK courts to taxpayers facing unfair or penal anti-avoidance rules.71

2.5.6 Impact of the GAAR

Has the GAAR altered the position? GAAR guidance provides:

B2.1 The GAAR Study Group Report was based on the premise that thelevying of tax is the principal mechanism by which the state pays for theservices and facilities that it provides for its citizens, and that alltaxpayers should pay their fair share. This same premise underlies theGAAR.It therefore rejects the approach taken by the Courts in a number of old

68 The case was not a tax case, and does not give much tax analysis. For completeness: the transfer at step (1) would in principle give rise to a trust gain but presumably thatdid not matter on the facts of the case.

69 [2019] EWHC 2039 (Ch) at [26].70 Whittaker v Concept Fiduciaries (Guernsey judgment 15/2017).71 See App 13.5.1 (Critique of s.87 regime).

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cases72 to the effect that taxpayers are free to use their ingenuity toreduce their tax bills by any lawful means, however contrived thosemeans might be and however far the tax consequences might differ fromthe real economic position.

HMRC cite one of the best known dicta in taxation:

[1] No man in this country is under the smallest obligation, moral orother, so to arrange his legal relations to his business or to hisproperty as to enable the Inland Revenue to put the largest possibleshovel into his stores.

[2] The Inland Revenue is not slow - and quite rightly - to take everyadvantage which is open to it under the taxing Statutes for thepurpose of depleting the taxpayer’s pocket.

[3] And the taxpayer is in like manner entitled to be astute to prevent,so far as he honestly can, the depletion of his means by theRevenue.73

HMRC say that the GAAR has changed this:

[The above quote] epitomises the approach which Parliament hasrejected in enacting the GAAR legislation. Taxation is not to be treatedas a game74 where taxpayers can indulge in any ingenious scheme in

order to eliminate or reduce their tax liability.75

At the abuse end of the spectrum, the GAAR now applies, so the ruleshave indeed changed. This impinges on the avoidance-morality debateinsofar as the debate only concerns successful avoidance, ie avoidance notcaught by the GAAR. But nothing else has changed. Ayshire itself was

72 The phrase “a number of old cases” is a tendentious way of referring to judicialauthorities to that effect from the earliest times until at least 1983; see 2.5.2 (Judicialview in the past). But GAAR guidance is not a neutral document: it is written byHMRC and adopts an HMRC perspective.

73 Ayrshire Pullman Motor Services v IRC 14 TC 754 at p.763.74 The game metaphor begs an essay to itself. What, in fact, is a game? It is an elastic

concept which can be analogised in different ways. What is it in the notion of gamewhich HMRC seek to identify as significantly different from tax? Is it a notion ofnon-seriousness? Or an adversarial approach? Or a notion of a rule-based activity? Or arbitrary rules? In the latter three respects, tax law and general law very muchresemble games. These problems suggest that it would help clarity of thinking not touse the word “game”: a stale and failed metaphor.See Midgley, Heart and Mind (1981) chapter 8 (The game game).

75 HMRC, “GAAR Guidance” (2017)https://www.gov.uk/government/publications/tax-avoidance-general-anti-abuse-rules

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2.24 Tax Avoidance

not an abuse case (the issue was whether the taxpayer’s children hadentered into a valid partnership) and the decision would not have beenaffected by the GAAR. It also continues to be the case that HMRCenforce egregious over-taxation when the rules work in their favour.

2.5.7 Codes of practice/regulators

PCRT provides:

Members must not create, encourage or promote tax planningarrangements or structures that i) set out to achieve results that are contrary to the clear intention of

Parliament in enacting relevant legislation and/or ii) are highly artificial or highly contrived and seek to exploit

shortcomings within the relevant legislation.76

I take this as a rough paraphrase of the GAAR. But as no-one would sensiblyadvise clients to enter into avoidance schemes which do not work, because ofthe GAAR or otherwise, it is (more or less) meaningless exhortation.

A more literal reading might take this as prohibiting advice on avoidancearrangements which do work. There are conflicting normative visions of thelawyer’s role, raising the basic question: can a good lawyer be a good person? For legal practitioners, client autonomy is a fundamental value, and the clientis in all cases entitled to be told what the law is. That is an aspect of the Ruleof Law.77 So this part of the PCRT does not apply to lawyers, because SRA/Barcodes of conduct have priority.78

SRA jumped to HMRC’s beat, in a document entitled “Tax avoidance - yourduties”:

In the House of Lords case of Ayrshire Pullman v CIR, Lord Clyde said

76 PCRT, Helpsheet B: Tax Advice. Para (ii) is otiose, but it does not matter.In 2015 HMRC called on the professional bodies “to take on a greater lead andresponsibility in setting and enforcing clear professional standards around thefacilitation and promotion of avoidance to protect the reputation of the tax andaccountancy profession and to act for the greater public good.” See “Tackling taxevasion and avoidance” (the juxtaposition is significant) (2015) para 3.19. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/413931/Tax_evasion_FINAL__with_covers_and_right_sig_.pdfThis was presumably the spur for PCRT Helpsheet B.

77 That view is not wholeheartedly accepted, or understood, by the general public or byHMRC, and a whole book would be needed to discuss this topic. For an introduction,see Windsor, “The Ethics of Government Legal Advisers” in Feldman (ed) Law inPolitics, Politics in Law (2015).

78 See 106.15.1 (Status of PCRT).

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that "No man in this country is under the smallest obligation, moral orother, so as to arrange his legal relations to his business or to hisproperty as to enable the Inland Revenue to put the largest possibleshovel into his stores." That approach has been rejected by Parliamentby bringing in the [GAAR].79

This is not correct.80

GAAR is clearly explained in HMRC guidance.

This is certainly not correct. It seems unlikely that the author read andunderstood the guidance (admittedly not an easy task).

Similarly, the widespread assumption that “tax avoidance is legal” nolonger applies.

This is not correct.81

While public tax debate is characterised by misinformation and shallowthinking,82 perhaps inevitably so, it is dispiriting to see the same appliesto the SRA.83

The Charity Commission has made the same points as the SRA.84 Iguess that HMRC sent a a circular to regulators, with draft text, and theregulators complied without consultation or comment from taxpractitioners.

These issues could be properly examined in the context of disciplinaryproceedings - but I doubt if it will ever happen in practice.

2.5.8 Views of non-tax practitioners

Outside the tax profession, the concept of what is unacceptable/immoralis not restricted to tax abuse, but extends to the ordinary tax planning

79 https://www.sra.org.uk/solicitors/code-of-conduct/guidance/warning-notices/Tax-avoidance---your-duties--Warning-notice.page (September 2017).

80 See 2.5.6 (Impact of the GAAR).81 Unless “avoidance” is intended to mean abuse within the scope of the GAAR.82 See App 15.1 (Nature of parliamentary debate).83 See Blackwell, “Conduct unbefitting: Solicitors, the SRA and Tax Avoidance” [2019]

BTR 31 concluding that some aspects of the SRA position are “simply wrong”.84 “Charity tax reliefs: guidance on Charity Commission policy” (2015): "The GAAR

makes it clear (!) that taxation is not to be treated as a game where taxpayers canindulge in any contrived or inventive scheme in order to eliminate or reduce their taxliability.”https://www.gov.uk/government/publications/charity-tax-reliefs-guidance-on-charity-commission-policy/charity-tax-reliefs-guidance-on-charity-commission-policy.

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level. That is, some very ordinary tax planning has come under fire. Practitioners might dismiss the views of those who know nothing abouttax as unworthy of consideration. I give four examples from those whoseviews carry some weight.

Deferring bonus in order to take advantage of announced reduction intax rates: This arose in 2013/14 when top rates fell from 50% to 45%. Practitioner-readers are likely to agree that this is ordinary tax planningnear the bottom end of the scale. But Mervyn King, then Governor of theBank of England, is reported to have criticised Goldman Sachs for it.85 The House of Lords select committee noted that the GAAR will not applyto the deferral of bonuses from one tax year to another,86 but one mightinfer that they disapproved none the less for that.

The Bump Plan In 2013 a minor political furore arose after DavidHeaton was secretly filmed, suggesting bonus payments to pregnantemployees; if made during the relevant period this would increase theamount of statutory maternity pay. I do not think practitioners wouldregard that as on the abusive side of the line (though there are many pointswhich need to be made to properly understand the legal and moralanalysis, none of which were heard in the public debate).87 The point wasnot just political hot air: Heaton had to leave the GAAR panel followingcriticism from David Gauke (Exchequer Secretary to the Treasury).

Income sharing by spouses I think practitioners were surprised thatHMRC found this unacceptable in their (ultimately unsuccessful) attack

85 Financial Times, 15 Jan 2013. King is co-author of the excellent (but now sadly outof date) British Tax System (5th ed, 1990).

86 Select Committee on Economic Affairs Report on The Draft Finance Bill 2013http://www.publications.parliament.uk/pa/ld201213/ldselect/ldeconaf/139/139.pdfThe Select Committee said this was because that “the issue is one concerning thestructure of the tax system rather than avoidance involving manipulation of loopholesin the legislation.” More analytically, the reason is that these are not examples of taxabuse (in my sense, which I take to be the same as the definition of “abusive” in theGAAR).The GAAR guidance makes this point; see 59.6.8 (Postpone disposal: GAAR).

87 In particular: (1) This planning does not give rise to a tax advantage, but to a benefitadvantage for the employer; it could not be counteracted by the GAAR. (2) Not everypayment to an employee is earnings so it is possible for planning of this kind to failon the facts. (3) The privacy aspects of secret filming, and the ease with which shortclips may misrepresent nuanced positions, seem particularly worrying.For the background, see Johnson, “Tax, Lies and Hypocrisy” (CCH Tax News , Issue133 25 September 2013); for the law, see the Statutory Maternity Pay (General)Regulations 1986.

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in Jones v Garnett. But exactly the same planning has been criticised inIndia:

While tax evasion is universally condemned, there is a disposition incertain quarters to regard tax avoidance as a permissible course ofaction. We are unable to endorse this view. The mere fact that theincome-tax law is not violated does not mean that the procedure whichresults in tax avoidance is justified. We might take as an illustration theact of introducing, without adequate consideration, one’s wife ... aspartner in a business of which the assessee himself is a partner. It is anattempt to fraction income and reduce tax liability under a provision oflaw meant to apply to genuine partnerships. Conduct of this nature,though legal, cannot but be regarded as anti-social.88

Gift of company to political party A donor who owns a suitable companymight arrange that:(1) The donor gives the company to the political party.(2) The political party extracts the funds by way of dividend.

The gift at stage (1) qualifies for CGT hold-over relief; and thedistribution at stage (2) would not be taxable, assuming the party is acompany for tax purposes.

It seems that Labour arranged this in 2013, giving rise to a fit ofindignation, or purported indignation, from the Tories. An open letterfrom George Osborne to Ed Milliband provided:

... the Labour Party has gone to great lengths to help your biggest donor,

... avoid paying tax on a political donation. ...The Labour Party registered a donation of shares in JML worth £1.65million in January 2013, from Mr John Mills. By making a donation inshares rather than as a single cash dividend, it has been reported that MrMills managed to avoid a potential tax charge of £724,710.89 ... As leader of the Labour Party, and given your previous statements ontax avoidance, such actions by your party appear to be directly at oddswith your public statements.Most importantly, will you now pass the amount of tax that has been

88 Government of India, Report of the Taxation Enquiry Commission (1953-54), Vol IIpara 5. For policy issues here, see 93.1 (Non-dom/non-resident spouse).

89 This figure is wrong: it represents a tax rate of 44%. The effective rate of tax shouldhave been 36.11% = £600k tax. Perhaps it is a typo. Perhaps it is irony. Perhaps no-one is intended to take the letter so seriously as to check the figures. If this is anindication of the tax advice given to Mr Osborne, it is rather worrying.

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avoided to the Exchequer? As you say, this is money that is needed tofund vital public services such as the health service and our schools.90

What is one to make of this? I think any practitioner, or anyone whounderstood the tax background, would regard this as in the category of“sensible tax planning” or, perhaps, ordinary tax planning; in either case,well short of avoidance and opprobrium. The letter could be seen as justan example of debased political debate, meaningless playground insultswhose object is just to knock the opposition. It could be taken as a casewhere ordinary tax planning is regarded as immoral. However, it may beregarded as an illustration of the difficulties which arise if one regardstaxation as governed by moral principles distinct from black letter tax law. The letter might then be regarded as a rather subtle contribution to thepolitical/moral debate. Perhaps there are elements of each of these.

2.5.9 Context of discussion

It is possible to discuss tax-morality in a lofty, disinterested and high-minded way. What is the good life? What would Aristotle say?

But in practice discussion is invested with flaming indignation, fuelledby hatred for those who support and connive with these injustices. Thisis fed by a sense of superiority that we are not like these instruments andaccomplices of evil. The result is moral panic, contempt, hatred andaggression.91 There is a great and easily mobilised hostility to anythingthat can be represented as avoidance. The remedies proposed become evermore penal and more discretionary.

The debate sometimes suffers from profound bad faith or hypocrisy. Politicians accuse others of tax-immorality in order to attack theiropponents. Or journalists do so to sell papers. A recent example arosewhen the archive of Tony Benn was transferred to the British Library,under the acceptance in lieu scheme, which one might have thoughtentirely innocuous.92

2.5.10 Conclusion

90 6 June 201391 This is a danger to which any discussion of morality is subject: see Taylor, A Secular

Age (2007) chapter 18.92 Reported by the Telegraph (4 Mar 2019) under the heading “Tories praise Tony

Benn’s financial planning as donation of his archive knocks £210,000 off family’s taxbill”. The article shows some signs of a libel readers scrutiny, as it falls just short ofan allegation of hypocrisy.

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In short, there is widespread disagreement about the starting point, not tomention finish line, when it comes to the concept of avoidance or onissues of morality in connection with tax avoidance. This should not bea surprise, since the same applies to many contemporary moral issues, forinstance, assisted suicide. There is no tribunal to adjudicate arguments onmorality, except the court of public opinion, which, as Ibsen observed, isan extremely mutable thing. But disapproval of avoidance, howeverunderstood, is now the norm. That that represents a major change ofattitude is now forgotten. Changes in morality are generally accompaniedby amnesia.

2.6 Tax gap

Another thread in public debate is a vast estimate of the amounts involved. HMRC publish annual figures, with great fanfare, and a catchy title, the“tax gap”. This is said to be £35 billion, or 5.6% of tax liabilities, in2017/18.93 Broken down, the HMRC figures are:

Amount Cause Comment£bn6.4 Failure to take reasonable care6.2 Legal interpretation94

5.3 Evasion Excluding hidden economy4.9 Criminal attacks 3.9 Non-payment Tax written off as uncollectible3.4 [Non-careless] error 3.0 Hidden economy Income source undeclared/understated1.8 Avoidance34.9 Total

Statistics are only as useful and reliable as the definitions on which theyare based. Most of these categories are vague and subjective, andassessment of the figures is, to say the least, challenging. I think a certain

93 HMRC, “Measuring tax gaps 2019 edition, Tax gap estimates for 2017-18” ( 2019)https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/820979/Measuring_tax_gaps_2019_edition.pdf

94 In HMRC terminology, a tax loss arises from “legal interpretation” when a taxpayeror tribunal disagrees with HMRC on an issue of tax law (excluding avoidance). Theconcept is so arbitrary and subjective that it can fairly be described as ludicrous.

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amount of scepticism is in order. There is a danger that spurious statisticsmay gain currency and influence policy.95

The combination of disparate categories makes the total tax gap figuremeaningless, but perhaps that is intended only for headline purposes.

IFS say:

we don’t know how much corporate tax is lost to the UK as a result oftax avoidance. This is partly because there is no accepted definition ofexactly what constitutes ‘avoidance’ and partly because we lack fullinformation about the activities of firms.96

Of course, the fact that an amount is unknown and unknowable does notmean that it is small or unimportant. I wonder if time spent guessing atfigures is productive. It is however striking how small a part taxavoidance plays in the tax gap figures, compared to the attention itreceives.

The IFS report continues:

Importantly, even if we knew that information and could calculate thetax lost to avoidance, it would not be right to assume that, were allavoidance opportunities to be completely removed, the UK would beable to collect that full amount. We would expect higher taxes to feedthrough, at least to some degree, to lower investment and changes inprices such that genuine UK profits may be lower. To the extent that thecorporate tax affects prices or wages, or the location of firms’ activities(and therefore jobs), there may also be lower receipts from income taxesor VAT.

This is true for all taxes, but particularly for corporation tax:

First, corporation tax is a particularly distortionary form of taxation thatcan work to reduce investment. This is especially the case forinternationally mobile investments because firms will consider tax whenchoosing where to locate real activities...

95 For a critique of the methodology, see Oxford University Centre for BusinessTaxation “The Tax Gap for Corporation Tax”, (2012)http://eureka.sbs.ox.ac.uk/4428/4/TaxGap_3_12_12.pdf. The HMRC paper itself acknowledges at p.3 that “there are many sources ofuncertainty and potential error”. But this is forgotten in the figures provided, whichpresent a spurious precision. For the practical relevance of the data, see Mirrlees Review, Dimensions in TaxDesign (2010), p.1132.

96 IFS, Green Budget 2013 p.297 http://www.ifs.org.uk/budgets/gb2013/gb2013.pdf

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Second, the ultimate incidence of corporate tax always lies withhouseholds and is borne either by the owners of capital (in the form oflower dividends), by workers (in the form of lower wages) or byconsumers (in the form of higher prices). We do not know with anyprecision who is made worse off as the result of the corporation tax.However, estimates suggest that, because capital tends to be much moremobile than workers or consumers, a significant share of the burden ofcorporate tax tends to be shifted to domestic factors – and specificallylabour. In other words, there is reason to believe that at least a part, andin some cases a large part, of the corporation tax that companies aresubject to is ultimately passed on to workers in the form of lowerwages.97

There is a certain irony in the second point, given the left’s enthusiasm forcorporation tax; I think most economists agree that the burden ofcorporation tax is borne by employees,98 though not all.

2.7 The Rule of Law

2.7.1 What is “the Rule of Law”

There is a consensus on the Rule of Law. It is a constitutional principle.99 It is one of four fundamental British values100 and one of the six values on

97 IFS, Green Budget 2013 p.290 http://www.ifs.org.uk/budgets/gb2013/gb2013.pdf(footnotes omitted).

98 ETPF Policy Paper 1 “Who bears the burden of corporate income taxation?” (2015)http://www.etpf.org/papers/PP001CorpTax.pdfEuropean Economic and Social Committee, “The Role of Taxes on Investment toIncrease Jobs in the EU – An Assessment of Recent Policy Developments in the Fieldof Corporate Taxes” (2019)https://www.eesc.europa.eu/sites/default/files/files/qe-03-19-343-en-n.pdf

99 Section 1 Constitutional Reform Act 2005.100 The other three are democracy, liberty and tolerance, according to the Government

“Prevent Strategy”, Cm 8092 (2011), para 6.58 where opposition to these values isthe definition of “extremism”. The point is repeated in the Government“Counter-Extremism Strategy” Cm 9148 (2015): “Extremism is the vocal or activeopposition to our fundamental values, including democracy, the rule of law,individual liberty and the mutual respect and tolerance of different faiths andbeliefs.”https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/97976/prevent-strategy-review.pdfhttps://www.gov.uk/government/uploads/system/uploads/attachment_data/file/470088/51859_Cm9148_Accessible.pdf

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which the EU is founded.101

There is no consensus on the meaning of the expression. It is anemotionally charged label for a set of principles, or sub-principles, thecontent of which is contested. This may not be a bad thing: consensus onthe importance of the Rule of Law is only possible because of dissensusas to its meaning. There is a certain irony in that the principle whichforbids vague legislation is itself difficult to pin down. But the same istrue of other cherished political virtues, such as democracy. A discussionneeds a book to itself;102 but as the term is used in different ways, it is bestnot to use it without some explanation of how it should be, or may be,understood. This section draws on the paper by Craig, “The Rule of Law”prepared for the House of Lords Constitution Committee.103

There is a consensus that the Rule of Law includes at least the followingminimum requirements.104

Craig says:

The Rule of Law and Lawful AuthorityA core idea of the rule of law to which all would subscribe is that thegovernment must be able to point to some basis for its action that isregarded as valid by the relevant legal system. Thus in the UK suchaction would commonly have its foundation in statute, the prerogativeor in common law power.

It follows that tax must be imposed by parliament through legislation. Craig continues:

The Rule of Law and Guiding ConductA further important aspect of the rule of law is that the laws thus

101 Article 2 TEU provides: “The Union is founded on the values of respect for humandignity, freedom, democracy, equality, the rule of law and respect for humanrights...”

102 Raz, The Authority of Law (2nd ed., 2009), ch. 11 (“The Rule of Law and itsVirtue”); Tamanaha, On the Rule of Law (1st ed, 2004); Pech, “The Rule of Law asa Constitutional Principle of the EU” (2009)http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1463242For the Rule of Law in a tax context, see Freedman & Vella,“HMRC’s Managementof the UK Tax System: The Boundaries of Legitimate Discretion” Legal Researchpaper No 73/2012 (2012)http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2174946##

103 http://www.publications.parliament.uk/pa/ld200607/ldselect/ldconst/151/15115.htm104 This may be referred to as a thin, formal, procedural or narrow understanding of the

Rule of Law.

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promulgated should be capable of guiding ones conduct in order thatone can plan ones life.It is from this general precept that Raz deduced a number of morespecific attributes that laws should have in order that they could be saidto comply with the rule of law. All are related to the idea of enablingindividuals to be able to plan their lives. The ‘list’ includes thefollowing(1) laws should be prospective, not retrospective; (2) they should be relatively stable; (3) particular laws should be guided by open, general and clear rules;105 (4) there should be an independent judiciary; (5) there should be access to the courts; (6) the discretion which law enforcement agencies possess should not

be allowed to undermine the purposes of the relevant legal rules.

Although not standard usage, in this work I write Rule of Law with initialcapitals. It is not exactly a technical expression, that suggests a precisionof meaning; but the capitals do indicate that it carries considerableintellectual baggage.

2.7.2 Rule of Law v. other values

The Rule of Law is something to boast of,106 and a feature which makesthe UK an attractive place to reside, invest or litigate. The Judicial Officeboast:

The Rule of Law represents the cornerstone of liberty and democracy,and is one of the main reasons that the UK attracts global businesses andinvestors.Laws in the UK are:• public (so that everyone knows what they say)• certain (so that everyone knows where they stand)• prospective rather than retrospective (so that they cannot be broken

before they exist)107

105 The OUCBT paper spells out an implication of this: “The rule of law requires thattaxpayers are able to determine the tax consequences of their actions in advance.This can only be done through legislation and not vague notions of fairness.”

106 The boast is an old one. See Blackstone’s Commentaries on the Laws of England(1765) vol 2 chap 37: “a country like this, which boasts of being governed in allrespects by law and not by will”; and contrast John Adams “A government of laws,and not of men” (1780).

107 “English Law, UK Courts and UK Legal Services after Brexit The View beyond2019”

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If only! Rule of Law principles are challenged, or breached, in variousaspects of taxation;108 and the conflict in the context of tax avoidance isparticularly deep. Anti-avoidance is facilitated by techniques whichbreach the Rule of Law:(1) Administrative discretion(2) Vague legislation(3) Retrospective legislation

It is desirable to recognise that:(1) There is a trade-off between two policy aims, the Rule of Law and the

combat of avoidance, rather than to fudge the matter by saying, orpretending, that these techniques are consistent with the Rule of Law.

(2) There is nothing in the idea of government by majority to show thatthe majority will always respect the Rule of Law.

Then one can face the choice aware of the consequences of one choice oranother. Craig says:

... the rule of law in the above sense is only one virtue of a legal system,and may have to be sacrificed to attain other desired ends. We may feelthat the rule of law virtues of having clear, general laws should besacrificed if the best or only way to achieve a desired goal is to havemore discretionary, open-textured legal provisions. This may be sowhere it is not possible to lay down in advance in the enablinglegislation clear rules in sufficient detail to cover all eventualities.Modifications to the rule of law in this manner are not somehowforbidden or proscribed. Given that it is only one virtue of a legal systemit should not prevent the attainment of other virtues valued by thatsystem.

In 1974, Lord Simon put the Rule of Law above the need to combat taxavoidance:

Disagreeable as it may seem that some taxpayers should escape whatmight appear to be their fair share of the general burden of nationalexpenditure, it would be far more disagreeable to substitute the rule ofcaprice for that of law.109

The cure could be worse than the disease. In contemporary UK debate it

108 See for instance the problems raised by Lobler 2.5.2 (Judicial views).109 Ransom v Higgs 50 TC 1 at p.94. A similar spirit informed the decision in Vestey

v HMRC in 1979; see 35.2 (Charge on transferor).

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is rare to find a statement in such strong terms. An exception comes fromthe Joint Committee on Statutory Instruments, discussing this provision:

If—(a) a person enters into any arrangements; and(b) the main purpose, or one of the main purposes, of the person in

entering into the arrangements is to avoid any obligation underthese Regulations,

these Regulations are to have effect as if the arrangements had not beenentered into.110

The Committee said:

... people who are satisfied that the terms of the regulations do not applyto them will be at constant risk of HMRC initially concluding that theyhave attempted to avoid the regulations and that the regulationstherefore apply anyway – that being the default position in the absenceof an appeal. It is unclear that such a result, which breaches the principleof certainty, would be within the contemplation of enabling powers thatdo not contain express provision for the type of anti-avoidance provisionused. The fact that Parliament has, notably in Part 5 of the Finance Act 2013,[the GAAR] enacted anti-avoidance provisions which are similarlyimprecise or discretionary is irrelevant to the security of such provisionsin subordinate legislation, in the absence of express enabling powers.The Committee accordingly reports regulation 21 for a doubt as towhether it is intra vires.111

But this example also illustrates the weakness of the Rule of Law in theUK:(1) Regulation 21, whose validity is in doubt, remains in the legislation.112

(2) Identical wording is found in:(a) reg 23 International Tax Compliance Regulations 2015113

110 Reg 21 The Taxes (Base Erosion and Profit Shifting) (Country-by-CountryReporting) Regulations 2016.

111 http://www.publications.parliament.uk/pa/cm201516/cmselect/cmstatin/461-ix/46103.htm#inst01

112 The Committee report was published after the provision came into force.113 The argument that reg. 23 is ultra vires is weaker than for reg. 21, because unlike the

position for the 2016 regulations, CRS authorises and requires “rules to prevent ... practices intended to circumvent the reporting and due diligence procedures”. See109.35 (CRS TAAR). Perhaps the argument is still tenable. Perhaps reg 23 will beread purposefully and somewhat restrictively.

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(b) The residence-property TAAR

Tax avoidance is an issue of international tax as well as domestic tax, andin the US, the Rule of Law is, perhaps, more highly valued.114 Bob Stack(US Treasury Deputy Assistant Secretary for International Tax Affairs)criticised OECD BEPS reforms, and UK diverted profits tax, forbreaching Rule of Law and international tax law principles:

Rather than producing administrable rules, the BEPS negotiatorsseemed to be opting instead for giving wide discretion to tax officials.115

This brought into question the whole international tax system. Do theinternational tax rules even matter anymore?” Do we really need astandard setter to say, ‘Tax administrators can use the pornography testto catch tax avoidance. We know it when we see it. And we will get youif we want to’?...[Diverted Profits Tax] ... took us further down the road in which ataxpayer is at the mercy of whatever a tax auditor decides is the rightamount to pay. What made this particularly perturbing was that thesemeasures emanated not from the usual suspects such as India, China,Brazil and South Africa, but from strong traditional residence countries[UK and Australia] that happened to be two of our closest friends.116

2.7.3 Breach of Rule of Law: Consequence

Craig says:

The fact that a law is vague or unclear, and that it therefore provideslittle by way of real guidance for those affected by it, will not lead to astatute being invalidated in the UK. The courts may well interpret sucha statute narrowly, in favour of the individual in such circumstances.They might also read it down pursuant to the Human Rights Act 1998,if the particular statute would otherwise infringe rights derived from theEuropean Convention on Human Rights. If the courts felt unable to readit down, they could issue a declaration of incompatibility under theHRA, and the matter would be sent back to Parliament forreconsideration. The courts therefore have considerable interpretivetechniques at their disposal to ensure that legislation that fails to meetthe requirements of the rule of law set out above is construed narrowly

114 Though it is difficult to assess the validity of such a broad generalisation and thestatement seems more debatable under the Trump administration.

115 For an example, see 7.19 (Tie-breaker: mutual agreement).116 Speech to OECD International Tax Conference, June 2015, as reported

https://www.bna.com/beps-troublegloves-off-b17179928708/

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in favour of the individual. This does not alter the fact that UK courtshave not traditionally exerted power to invalidate an Act of Parliamenton such grounds.

In relation to secondary legislation (statutory instruments) the courts couldstrike down provisions on the grounds of breach of the Rule of Law(which might be said to be ultra vires, in the absence of very clear or directauthority in the authorising act of parliament). But in practice as far as Iknow it has never happened.

In other words, the Rule of Law lacks full justiciability. Perhapsironically, the Rule of Law is not in the strict sense a rule of law. Buthowever deeply, inchoately, and inconsistently, the Rule of Law still tosome extent affects tax policy and case law outcomes.117

2.7.4 Tax: Rule of Law compliance

As the Rule of Law is a set of principles, this issue raises a set of almostimpossibly broad questions.

In earlier editions118 of this book, I said:

The UK tax system is largely119 based on the rule of law rather thaninformal practice and discretion.

By the 13th edition (2014) I qualified the boast:

However, that is less the case than formerly, due to:(1) wide, complex, or vague anti-avoidance provisions mitigated byinformal practice, HMRC guidance, HMRC discretion or oversight.(2) retrospective legislation.120

In 2014 the City of London Law Society said:

2.4 ... tax policymakers are insufficiently conscious of the importanceof the rule of law – that is, the constitutional right of a citizen todetermine the law applicable to him at any given date. Related to this isa similar problem of lack of respect for legislation as the only proper

117 In the context of rules which tend to prevent access to a Court, the Rule of Lawaffects outcomes more directly; see for example Haworth v HMRC [2019] EWCACiv 747 at [66].

118 See Kessler, Taxation of Non-Residents and Foreign Domiciliaries (3rd ed., 2004). 119 For one exception, see 12.24 (Forward tax agreements).120 Kessler, Taxation of Non-Residents and Foreign Domiciliaries (13th Edn.,2014)

Vol 1 para 2.4 (The Rule of Law).

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source of law, and over-reliance on guidance.121

In 2015 the Law Society makes the same point:

... in recent years, there has been a tendency on the part of governmentto allow the rule of law in taxation to risk being eroded in the interestsof making the executive more effective, in particular in seeking tocombat avoidance...

The following examples draw on the lists of these bodies supplementedby my own:(1) The absence of a right to appeal so obligations are determined by

HMRC discretion:(a) The Banking Code of Practice on Taxation; there is no right of

appeal against HMRC determination of a breach of the code. (b) Follower notices: there is no right of appeal against the issue of

such a notice on a number of important grounds. (2) Retrospective taxation.(3) Uncertainty in tax law. Sometimes this may be deliberate. For

instance, Jim Harra, Director General, Business Tax at HMRCapplauds the uncertainty of the GAAR:

It will also create an additional level of uncertainty for the promotersand users of schemes. I believe that that will be a deterrent.122

(4) Anti-avoidance legislation drafted widely and then cut down byHMRC concession mislabeled as guidance. Examples include:(a) s.30 FA 2014 (avoidance by transfer of corporate profits)(b) The capital-loss TAAR123 and the same is true generally of

TAARs, which have become standard in new legislation.

2.8 Retrospective tax legislation

There is general agreement that the Rule of Law includes a prohibition of

121 Response to OTS competitiveness review (2014) http://www.citysolicitors.org.uk/attachments/article/105/20140605%20Response%20to%20Office%20of%20Tax%20Simplification%E2%80%99s%20’Competitiveness%20review%20-%20initial%20thoughts%20and%20call%20for%20evidence’.pdf

122 Hansard, Public Accounts - Minutes of Evidence (6 December 2012)http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/788/121206.htm

123 See 68.21 (Capital-loss TAAR).

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retrospective legislation. Although a sub-topic of the Rule of Law, the topic deserves a separate

discussion. A full discussion requires a book to itself.124

2.8.1 Meaning of retrospective

It seems to me that retrospectivity is best considered as a matter of degree,not a matter of yes/no, either/or. Legislation not retrospective in form may be retrospective in effect, if it operates by reference to arrangementscarried out in the past, and/or lacks fair and appropriate transitionalprovisions. In assessing whether (or, better, the extent to which) aprovision is retrospective, one should have regard to the object of theprohibition on retrospective legislation, which is that a person should bereasonably able to plan their affairs on the basis of what the law says. Inthis sense, legislation backdated to the date of an announcement of aproposed change in the law is not retrospective, or at least notobjectionably so.

On this analysis, to determine whether a provision is retrospective is anevaluative exercise. So those defending legislation can and generally docontend, with varying degrees of plausibility, that the relevant provisionis not retrospective.125

The issue does not usually arise in a justiciable context. We are in therealm of politics, not law.

2.8.2 Retrospective legislation: Extent

It is perhaps only a slight exaggeration to say that retrospective taxlegislation has become a matter of routine, having been applied inparticular to a somewhat arbitrary selection of tax avoidance schemes. Examples include:(1) Retrospective reversal of avoidance schemes; for examples see:

(a) 49.24 (DT relief for partnership)

124 For an illuminating discussion of the policy issues in a US context, see Shaviro,When Rules Change (1st ed, 2000). UK taxpayers may on this point look with envyto the USA, where a norm opposing retrospective legislation is “strongly rooted inpopular sentiment, legislative practice, and perhaps even the Constitution as thecourts are likely to interpret it” (p.104).

125 See for instance HM Treasury, “Section 95 of the Finance Act 2019: report on timelimits and the charge on disguised remuneration loans” (March 2019)https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/789160/DR_loan_charge_review_web.pdf

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(b) s.23 FA 2012 (loan relationships)(2) Provisions retrospective in effect:

(a) Pre-owned assets (2004)126

(b) IHT treatment of former Accumulation & Maintenance trusts(2006)

(c) Aspects of the ITA remittance rules (2008)127

(d) The extended time limits for offshore matters

2.8.3 Retrospective legislation: Protocol

In Budget 2011, the coalition Government published a statement (grandlylabelled a “protocol”) on retrospective legislation. The most importantpart provides:

The Government has made clear its aim to strike the right balancebetween [1] restoring the UK tax system’s reputation for predictability, stability

and simplicity (!) and [2] preserving its ability to protect the Exchequer by making changes

where necessary. In particular, changes to tax legislation where the change takes effectfrom a date earlier than the date of announcement will be whollyexceptional.128

The attempt to formulate the principles behind a decision to enactretrospective legislation is to be applauded. But the sanction (if any) forignoring the protocol is political only.

The 2011 statement does not purport to bind future governments. TheCameron administration (2015 - 2016) did not resile from it, but the extentto which the current or subsequent administrations will follow it remainsto be seen. The protocol has perhaps shifted political debate from whetheror not legislation is justified to debate on whether or not legislation isretrospective, but it is doubtful whether it has had much if any effect onthe outcome.

2.8.4 Retrospective legislation: Validity

The Rule of Law is not justiciable as such and so neither is the restriction

126 See 92.39.2 (Retrospectivity).127 See 1.8.3 (Fairness of 2008 reforms).128 http://webarchive.nationalarchives.gov.uk/20130129110402/http://cdn.hm-treas

ury.gov.uk/2011budget_taxavoidance.pdf

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on retrospective legislation. Human Rights challenges have not beensuccessful.129 The protocol has not changed this. That is self-evident, butif authority is needed:

The Protocol was an extra-statutory announcement or promise made bythe government. As such, it operated: in the realm of politics, not of thecourts, and the question whether the government should be held to sucha promise is a political rather than a legal matter... The sovereignty ofParliament cannot be confined by extra-statutory promises like theProtocol.130

I think this is as it should be: the content of legislation is in principle amatter for parliament and not for the courts.

2.8.5 Retrospective legislation: Politics

Various reasons have been given to justify retrospective legislation. One is that it concerns an avoidance scheme which will fail (or so the

Government believe). If that is true, the legislation is unnecessary; if not(and it is generally debatable) it is not a good reason.

Another is that it concerns an abusive avoidance scheme (however thatflexible term may be understood). Whether that justifies retrospectivelegislation is ultimately a political question on which views differdepending on how much one values the Rule of Law. It is arbitrary andunfair in that a few particular schemes are retrospectively stopped andothers – no less elaborate, artificial and abusive – are not. Pragmatists (towhom the Rule of Law is of little interest) should bear in mind thatretrospective legislation increases the “legal risk”, a measure under whichthe UK falls low on international surveys, and the lowering of the UK’sreputation in that regard has a significant albeit intangible cost. I suspectmajor factors in picking on some arrangements may include salience,politics, and the amount of money involved.

2.8.6 Retrospective relieving legislation

Retrospective legislation has also become common to provide relief forunintended charges under(what the need for retrospective legislationshows to be) ill thought out legislation. The policy issues are different

129 See R oao Huitson v HMRC [2011] STC 1860; R oao APVCO 19 Ltd v HMTreasury [2015] EWCA Civ 648; Zeeman v HMRC [2020] EWHC 794 (Admin).

130 R oao APVCO 19 Ltd v HM Treasury [2015] EWCA Civ 648 at [58].

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here. So far as retrospective legislation favours the taxpayer, most wouldregard it as unobjectionable on Rule of Law grounds; even to the Rule ofLaw purist, it is less objectionable than the alternative of extra-statutoryconcession. But the need for it on a regular basis should cause concernabout the quality of the tax legislation process.

2.8.7 Retrospective legislation: Future

How often will retrospective legislation be used in the future? Whatadvice can anyone give to taxpayers seeking to know their position? Priorto the enactment of the GAAR, I said:

Much depends on the politics of the day, but I guess that retrospectivelegislation will continue to be a rare response; a popular scheme carriedout by many taxpayers and involving larger sums is certainly more atrisk than others.131

The compatibility of the GAAR with the Rule of Law is open to debate,on the grounds of vagueness in particular. But one positive consequencemay be (and should be) at least to restrict the practice of retrospective anti-avoidance legislation; wholly retrospective legislation should less often benecessary. But effectively retrospective legislation, in the form of unfaircommencement rules, will no doubt continue.

2.9 TAAR/unallowable purpose test

2.9.1 TAAR terminology

TAAR stands for “targeted anti-avoidance rule”. It is used to describeunallowable purpose tests in specific UK tax codes132 (as opposed to theGAAR, which is an unallowable purpose test which applies throughouttaxation).

As far as I know, the term “TAAR” was coined by HMRC and first usedin a press release of 5 December 2005. The term “unallowable purpose”was first used by Parliamentary Counsel in 1996, in the context of loanrelationships.133

Before then the term used was motive (or purpose) test. Those labelsremain in use primarily for older TAARs, such as the ToA motive

131 Kessler, Taxation of Non-Residents and Foreign Domiciliaries (7th ed., 2008), Vol.1132 TAAR may also refer to the wider anti-avoidance rule of which an unallowable

purpose test forms part; but I here focus only on the unallowable purpose test.133 See Para 13 sch 9 FA 1996, now s.441 CTA 2009.

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defence.“TAAR” is best regarded as a technical term, detached from its literal

meaning. So IFS can say without obvious irony that:

TAARs need to be well targeted ... costs can outweigh the ... lostrevenues when a poorly targeted TAAR is compared with awell-targeted TAAR.134

“TAAR” is a tendentious, approbative term; who could object to targetedanti-avoidance? Parliamentary Counsel rightly do not use it in statutorydrafting. “Unallowable purpose test” is more transparent, but clumsy. Anappropriate term might be “specific anti-avoidance rule” (SAAR) but thatis not in common use. So slightly reluctantly, I use “TAAR” in itstechnical sense in this work.

2.9.2 Types of TAAR

The number of TAARs is very large.135 Although there is a variation ofwording, TAARs share a common framework or frameworks. I woulddistinguish three types of TAAR, depending on the nature of theunallowable purpose test, and coin the following terminology to describethem:

Style of TAAR Unallowable purpose expressed asAvoidance-purpose TAAR Tax avoidance (in its strict sense)Tax-advantage TAAR Obtaining a tax advantageApplication/effect TAAR Avoiding application/effect of specified rules

A tax-advantage style TAAR is very wide, if one understands “taxadvantage” to include cases where there is no element of tax avoidance.

An application/effect style TAAR may be wider still. The JointCommittee on Statutory Instruments said this wording is too wide andvague.136 But no-one has taken any notice of that. It continues to be acommon form (perhaps it will become the most common form) for newTAARs.

134 The same report refers later to a “wide-ranging TAAR”. IFS, “Countering TaxAvoidance in the UK” TLRC discussion paper 7 (2009), para 8.18http://www.ifs.org.uk/comms/dp7.pdf.

135 Unallowable Purpose Tests Draft Guidance p.7 gave the number as “over 200” in2009. The number increases with every Finance Act. For the Draft Guidance, see38.1 (Motive defence: Introduction).

136 See 2.7.2 (Rule of Law v. other values).

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Cases on one TAAR can shed light on others, though one must allow fordifferences of context and wording. The most litigated is the TiS purposetest, though in recent years there have been more cases on the loanrelationship TAAR. Instances where cases on one TAAR have been citedin cases on another TAAR include:(1) ToA cases cited in TiS cases (& vice versa)137

(2) Pre-2010 TiS cases may be relevant to the current IT TiS code

TAAR wording sometimes includes a commerciality test, and sometimesincludes “reasonable to assume/conclude” wording.

Here is a table of TAARs discussed in this book:

137 In Willoughby in the Court of Appeal, Brebner, a TiS case, was cited in the contextof the ToA motive defence.

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Test Reason Commercial138

Topic Type of TAAR Para -able139 DateToA Tax avoidance 38.1 Transfer/assoc ops Y Y 1936/2005TiS (CT) Tax advantage – Transactions in securities Y 1960Loan relationships Tax advantage 2.11.5 Transaction Y 1996SDLT group relief Tax avoidance 38.41.3 Transaction Y 2005Capital loss Tax advantage 59.21 Arrangements 2007Mixed fund Tax advantage 15.10 Arrangements 2008TiS (IT) Tax advantage 55.9 Transaction in securities 2010s.3 TCGA Tax avoidance 67.18 Arrangements 2012GAAR Tax advantage – 140 Arrangements Y 2013DIMF Application 53.10 Arrangements 2015Carried interest Application 53.18 Arrangements 2015CRS Application 109.35 Arrangements 2015Country reporting Application 2.7.2 Arrangements 2016Land-dealing Tax advantage 17.4 Arrangement 2016Transactions in land Tax advantage 17.15 Arrangement 2016Royalty deemed source Effect 24.6.3 Arrangements 2016Royalty withholding tax Effect 24.9.3 Arrangements 2016Winding up Tax advantage 23.6.4 Winding-up Y 2016Residence-property Effect 90.17 Arrangements 2017Profit Fragmentation Tax advantage 39.16 Arrangements Y 2019Land-rich company Tax advantage 60.14.1 Arrangements 2019

This is not a full list, but it is evident that the number of TAARs hasexploded since about 2012; though unannounced, and not much discussed,this constitutes a major change in tax policy.

2.9.3 Disentangling issues

Discussion of (say) a tax advantage TAARs can logically be split into anumber of distinct issues:(1) Is there a tax advantage (with a sub-issue, the meaning of tax

advantage)(2) Is there a purpose to obtain a tax advantage (with sub-issues as to the

meaning of purpose and how to ascertain purpose)(3) Is that a “main” purpose

138 Commercial test included; see 38.5 (“Commercial”: undefined sense).139 “Reasonable to assume” wording included; see 38.10 (Reasonable to

conclude/assume).140 I do not discuss the GAAR as a discrete topic in this book, but GAAR guidance is

discussed in many contexts.

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But in practice discussion easily segues from one to the other.

2.9.4 Effect of TAAR

If the conditions of a TAAR are met, the consequence may be:(1) As specified in the TAAR:

(a) Disapply a specified relief(b) Apply specified anti-avoidance rules

(2) Counteraction (details unspecified)(3) Disregard effect of arrangements

Here is a table of consequences of TAARs discussed in this book:

Topic Type of TAAR Para Consequences DateToA Tax avoidance 38.1 Apply ToA rules 1936/2005TiS (CT) Tax advantage – Counteraction 1960TiS (IT) Tax advantage 55.9 Counteraction 2010SDLT group relief Tax avoidance 38.41.3 Disapply group relief 2005Capital loss Tax advantage 59.21 Disapply loss relief 2007Mixed fund Tax advantage 15.10 Just and reasonable 2008s.3 TCGA Tax avoidance 67.18 Apply s.3 rules 2012GAAR Tax advantage – 141 Counteraction 2013DIMF Application 53.10 Disregard arrangement 2015Carried interest Application 53.18 Disregard arrangement 2015Country reporting Application 2.7.2 Disregard arrangement 2016Land-dealing Tax advantage 17.4 Counteraction 2016TiL Tax advantage 17.15 Counteraction 2016Royalty deemed source Effect 24.6.3 Disregard Arrangements 2016Royalty withholding tax Effect 24.9.3 Disregard arrangement 2016Winding up Tax advantage 23.6.4 Apply winding-up rule 2016Residence-property Effect 90.17 Disregard arrangement 2017Profit Fragmentation Tax advantage 39.16 Apply profit fragment’n rules 2019Land-rich company Tax advantage 60.14.1 Counteraction 2019

The approach of disregarding the arrangement is novel, and problematic. What does one regard and what does one disregard? It will probably beinterpreted in a similar manner to a just and reasonable counteraction.

2.10 “Main” purpose

141 I do not discuss the GAAR as a discrete topic in this book, but GAAR guidance isdiscussed in many contexts.

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TAARs generally refer to main purpose.142

I consider “purpose” elsewhere,143 but here consider “main purpose”.In Travel Document Service & Ladbroke Group International v HMRC:

I do not accept that, as was submitted by [counsel for HMRC], “main”,as used in paragraph 13(4) of schedule 9 of FA 1996, means “more thantrivial”. A “main” purpose will always be a “more than trivial” one, butthe converse is not the case. A purpose can be “more than trivial”without being a “main” purpose. “Main” has a connotation ofimportance.144

HMRC formerly argued that:

any purpose which is more than incidental is prima facie a mainpurpose.145

But that is no longer tenable.One sometimes sees the phrase “more than mere icing on the cake”146 but

that stale metaphor does not help much, if at all. 2.11 “Tax advantage”

2.11.1 Tax advantage: Definitions

The expression “tax advantage” is used in (what I call) tax-advantage styleTAARs. It is always defined. There is no single standard definition, butthe definitions generally adopt common form wording, with minorvariations, so it is helpful to consider the definitions together as a singletopic.

142 The ToA motive defence is an exception here (omitting the word main); see 38.4(Enactment history). The CT TiS TAAR refers to object (not purpose) but the meaning is the same: see38.12 (Foresight and purpose).

143 See the discussion beginning at 38.9 (Identify and classify purpose).144 [2018] EWCA Civ 549 at [48]. This was said in relation to the main purpose test

in the loan relationship rules, but the comment applies generally in TAARs.145 HMRC Discussion Document “Simplifying Unallowable Purpose Tests” (2009) para

10140https://webarchive.nationalarchives.gov.uk/20100513000206tf_/http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ConsultationDocuments&id=HMCE_PROD1_029748&propertyType=document&columns=1.

146 IRC v Sema Group Pension Scheme 74 TC 593.

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The expression was first used in the TiS purpose test in 1960.147 Thatdefinition survives in the current CT version of the rules and elsewhere.

I discuss here the following definitions:148

Definition (my terminology) ReferenceIT/CGT definition ManyGAAR definition s.208 FA 2013 CT definition s.1139 CTA 2010IHT definition s.162A(8) IHTA

IT/CGT definition149 GAAR definition IHT definition CT definition

“corporation taxadvantage”means—

A “tax advantage”includes—

“tax advantage”means—

(2) “Taxadvantage”means—

(a) a relief fromcorporation tax orincreased relieffrom corporationtax,

(a) relief orincreased relieffrom tax,150

(a) a relief fromtax or increasedrelief from tax,

(b) a repayment ofcorporation tax orincreasedrepayment ofcorporation tax,

(b) repayment orincreasedrepayment of tax,

(b) a repayment oftax or increasedrepayment of tax,

147 Section 43(4)(g) FA 1960.148 TiS has a slightly non-standard definition: see 55.12.1 (“Income tax advantage”).149 I set out s.732(1) CTA 2010 as an example of this form. The actual tax referred to

varies from place to place but in other respects this definition is standard. 150 In the GAAR definition itself, the word “tax” is of course widely defined. Section

206(3) FA 2013 provides:“The general anti-abuse rule applies to the following taxes—(a) income tax,(b) corporation tax, including any amount chargeable as if it were corporation tax

or treated as if it were corporation tax,(c) capital gains tax,(d) petroleum revenue tax,(da) diverted profits tax,(e) inheritance tax,(f) stamp duty land tax, and(g) annual tax on enveloped dwellings.”

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(c) the avoidanceor reduction of acharge tocorporation tax oran assessment tocorporation tax, or

(c) avoidance orreduction of acharge to tax or anassessment to tax,

(a) the avoidanceor reduction of acharge to tax, or

(c) the avoidanceor reduction of acharge to tax or anassessment to tax,

(d) the avoidanceof a possibleassessment tocorporation tax.

(d) avoidance of apossibleassessment to tax,

(b) the avoidanceof a possibledetermination inrespect of tax.

(d) the avoidanceof a possibleassessment to tax,

(e) deferral of apayment of tax oradvancement of arepayment of tax,and

(f) avoidance ofan obligation todeduct or accountfor tax.151

(da) the avoidanceor reduction of acharge orassessment to acharge under Part9A of TIOPA2010 (controlledforeigncompanies),

(e) the avoidanceor reduction of acharge orassessment to thebank levy underSchedule 19 toFA 2011 (thebank levy), or

151 I think para (f) is referring to withholding tax.

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(f) the avoidanceor reduction of acharge to divertedprofits tax.

The drafter sometimes adds a provision that:

it does not matter whether the avoidance or reduction is effected—(a) by receipts accruing in such a way that the recipient does not

pay or bear income tax on them, or(b) by a deduction in calculating profits or gains.

This also derives from the original 1960 provision. It is hard to see whatit adds, and it probably adds nothing.152 But as the precedent is there it hasoften been followed.

The GAAR definition is wider than the standard IT/CGT definition inthree respects:(1) It has become an inclusive definition. But since it is so widely

defined, it is not easy to think of anything which is a tax advantagewhich does not fall within paras (a) to (f).

(2) Paras (e) and (f) are added.

Post-2013 TAARs often adopt the GAAR definition, either by referenceor repeating it verbatim, (though generally with a narrower definition of“tax”).

The standard IHT definition is based on the standard IT/CGT definitionof tax advantage, adapted as appropriate for IHT.

2.11.2 Tax advantage: Comparators

The context of each TAAR is important, but some general comments canbe made.

The GAAR guidance provides:

The concept of a ‘tax advantage’ is common in UK tax legislation. Thelanguage suggests that in deciding whether an advantage arises theactual tax position should be compared with another tax position.The appropriate comparison or alternative tax position will depend on

152 This is (almost) self-evident, but if authority is needed, see HMRC v HyraxResourcing Ltd [2019] UKFTT 175 (TC) at [185]: “I would say that thoseadditional words are unnecessary as that meaning is implicit in the first part of thedefinition ...”.

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the facts, but will usually derive from the arrangements that would haveoccurred without the abusive tax purpose (which may include noarrangement at all).In situations where there is more than one alternative arrangement thatmight have been adopted if the taxpayer had not adopted an abusivearrangement, then the appropriate comparison would be the transactionthat the taxpayer would most likely have carried out.153 This might notbe the arrangement that would give rise to the greatest tax liability.154

The loss-TAAR guidance155 proposes a test to help identify the mainpurpose:

... it will be relevant to draw a comparison in order to consider whether,in the absence of the tax considerations:[1] the transaction giving rise to the advantage would have taken place

at all;[2] if so,

[a] whether the tax advantage would have been of the sameamount;156 and

[b] whether the transaction would have been made under the sameterms and conditions.

I refer to this as a “but-for” test. It is not a decisive test.Where the taxpayer passes the but-for test, ie the same arrangements

would be made even without the tax advantage, it is likely that tax is nota main purpose. But tax might still be a main purpose. A person mayhave two main purposes, P1 (non-tax) and P2 (tax) either of which maybe sufficient to cause the arrangements.

153 Footnote original: This follows the approach adopted by Lord Hoffmann in theHong Kong case IRC v Tai Hing Cotton Mill (CACV 343/2005): “[TheCommissioner] would not be entitled, as the more alarmist submissions of counselfor the taxpayer suggested, to make an assessment on the hypothesis that thetaxpayer had entered into an alternative transaction which attracted the highest rateof tax. That would not be a reasonable exercise of power. But she may adopt thehypothesis which the evidence suggests was most likely to have been the transactionif the taxpayer had not been able to secure the tax benefit.”

154 HMRC “GAAR Guidance” (2015) para C2.5https://www.gov.uk/government/publications/tax-avoidance-general-anti-abuse-rules

155 See 63.19 (Capital-loss TAAR).156 Para [a] is not well expressed. It seems to ask whether in the absence of the tax

considerations the tax advantage would have been of the same amount. It is notclear what point is being made here. But the rest of the paragraph makes sense.

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Where the taxpayer fails the but-for test, ie the same arrangements wouldnot have been made but-for the tax advantage, it is likely that tax is a mainpurpose. A person may have two purposes, P1 (non-tax) and P2 (tax),where P1 is the main purpose (but not sufficient to trigger thearrangements). P2 is just enough, the straw that breaks the camel’s back,but not a main purpose in itself. But that scenario seems somewhatimplausible.

Elsewhere in the loss-TAAR guidance, HMRC say:

So to determine whether or not the TAAR applies all the circumstancessurrounding the arrangements have to be taken into account,considering:• the overall economic objective of the arrangements,• whether that objective is one that the participants might be expected

to have, and which is genuinely being sought, and• whether that objective is being fulfilled in a straightforward way, or

additional, complex or costly steps have been inserted.

2.11.3 Loan relationship TAAR guidance

The guidance on the loan relationship unallowable purpose test is lengthy,but worth setting out in full.

Section 441 CTA 2009 provides the rle:

(1) This section applies if in any accounting period a loan relationshipof a company has an unallowable purpose.(2) The company may not bring into account for that period for thepurposes of this Part so much of any credit in respect of exchange gainsfrom that relationship as on a just and reasonable apportionment isattributable to the unallowable purpose.(3) The company may not bring into account for that period for thepurposes of this Part so much of any debit in respect of that relationshipas on a just and reasonable apportionment is attributable to theunallowable purpose.(3A) If—

(a) a credit brought into account for that period for the purposes ofthis Part by the company would (in the absence of this section)be reduced, and

(b) the reduction represents an amount which, if it did not reduce acredit, would be brought into account as a debit in respect of thatrelationship,

subsection (3) applies to the amount of the reduction as if it were anamount that would (in the absence of this section) be brought into

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account as a debit.(4) An amount which would be brought into account for the purposes ofthis Part as respects any matter apart from this section is treated for thepurposes of section 464(1) (amounts brought into account under thisPart excluded from being otherwise brought into account) as if it wereso brought into account.(5) Accordingly, that amount is not to be brought into account forcorporation tax purposes as respects that matter either under this Part orotherwise.157

Section 442 CTA 2009 defines “unallowable purpose”:

(1) For the purposes of section 441 a loan relationship of a company hasan unallowable purpose in an accounting period if, at times during thatperiod, the purposes for which the company—

(a) is a party to the relationship, or(b) enters into transactions which are related transactions158 by

reference to it,include a purpose (“the unallowable purpose”) which is not amongst thebusiness or other commercial purposes of the company.(2) If a company is not within the charge to corporation tax in respect ofa part of its activities, for the purposes of this section the business andother commercial purposes of the company do not include the purposesof that part.(3) Subsection (4) applies if a tax avoidance purpose is one of thepurposes for which a company—

(a) is a party to a loan relationship at any time, or(b) enters into a transaction which is a related transaction by

reference to a loan relationship of the company.(4) For the purposes of subsection (1) the tax avoidance purpose is onlyregarded as a business or other commercial purpose of the company ifit is not—

(a) the main purpose for which the company is a party to the loanrelationship or, as the case may be, enters into the relatedtransaction, or

(b) one of the main purposes for which it is or does so.(5) The references in subsections (3) and (4) to a tax avoidance purposeare references to any purpose which consists of securing a tax

157 Also see s.455B CTA 2009.158 Defined s.42(1A) CTA 2009: “In subsection (1)(b) “related transaction”, in relation

to a loan relationship, includes anything which equates in substance to a disposal oracquisition of the kind mentioned in section 304(1) (as read with section 304(2)).”

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advantage159 for the company or any other person.

This sets out two tests:(1) a purpose which is not a business/commercial purpose of the company(2) tax advantage

This differs in part from standard TAAR wording. But the guidance isstill relevant for other TAARs. The CF Manual provides:

CFM38150 Example [Nov 2019]Example of unallowable purposeA company borrows £50 million from a finance company at arm’s length. The companybecomes insolvent and disposes of all its assets. This leaves it with an outstanding debtof £40 million. The company is not liquidated and interest continues to accrue on thedebt. The finance company either does not accrue the interest receivable or it accrues theinterest and then writes it off as a bad debt. The company accrues the interest and makesa deficit on which group relief claims are made. The company has no activity which is within the charge to corporation tax(CTA09/S442(2)). The purpose of the loan relationship is therefore specifically excludedfrom being a business or commercial purpose and it is an unallowable purpose. In addition, although the loan relationship was originally bona fide, its continuedexistence is not commercial. The test of unallowable purpose given by CTA09/S442(1)& (2) is the purpose of the loan relationship in the accounting period. The only purposeof the loan relationship in the current accounting period is to generate group relief,securing a tax advantage for another group company (CTA09/S442(5)). The debits relating to the loan relationship should be disallowed.CFM38160 Application [Nov 2019]Applying the unallowable purposes rule... You will note from the Economic Secretary’s comments that SS441-442 • will normally apply where UK branches of overseas companies borrow for overseas

activities outside the UK tax net,• will not normally apply where a company borrows to acquire shares in companies,

whether in the United Kingdom or overseas, or to pay dividends, provided that theborrowings are not structured in an artificial way. And a similar view is taken as regardsborrowings, whether from a third party or intra group, to acquire other business assetswhether located in the United Kingdom or overseas. This approach is not affected bythe substantial shareholdings rules, and

• will not normally apply where a company is choosing between different ways ofarranging its commercial affairs, if it chooses the course that gives a favourable taxoutcome, provided that tax avoidance is not the object, or one of the main objects, ofthe arrangements.

159 “Tax advantage” has the CT definition: see s.476(1) CTA 2009. It is confusing touse the term “tax avoidance” and define it to mean tax advantage, as the twoconcepts are usually used with quite distinct meanings. But there it is.

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CFM38170 Application: Hansard Report [Nov 2019]Applying the unallowable purposes rule: Economic Secretary’s comments‘The Government are aware of concerns that have been raised by my hon. Friends andby others regarding the particular anti-avoidance provisions in paragraph 13 [nows.441/442]. This paragraph was amended significantly in Standing Committee but,because of the concerns that my hon. Friends and others have raised, I take theopportunity to allay some of the fears that have been expressed about the anti-avoidancerules. Paragraph 13 of the schedule disallows tax deductions to the extent that tax avoidance isthe main motive behind a loan relationship. We have been told of concerns that this couldbe interpreted as preventing companies from getting tax relief for legitimate financingarrangements. I am happy to offer a reassurance that this is not the intention of thelegislation. The paragraph denies tax deductions on loans that are for the purpose ofactivities outside the charge to corporation tax. Among other things, this will ensure thatUnited Kingdom branches of overseas companies do not get tax relief for borrowings thatare for overseas activities outside the United Kingdom tax net. We have been asked whether financing - which, for example, is to acquire shares incompanies, whether in the United Kingdom or overseas, or is to pay dividends - wouldbe affected by the paragraph. In general terms, the answer is no, but the paragraph mightbite if the financing were structured in an artificial way. It has been suggested that structuring a company’s legitimate activities to attract a taxrelief could bring financing within this paragraph - some have gone so far as to suggestthat the paragraph might deny any tax deduction for borrowing costs. These suggestionsare clearly a nonsense.160 A large part of what the new rules are about is ensuring thatcompanies get tax relief for the cost of their borrowing. One specific point has been put to me by my hon. Friend the Member for Gloucester -that is, borrowing by a finance leasing company to acquire assets where this is more taxefficient than the lessee investing in the asset direct. Again, I am happy to offer areassurance. Where a company is choosing between different ways of arranging itscommercial affairs, it is acceptable for it to choose the course that gives a favourable taxoutcome. Where paragraph 13 will come into play is where tax avoidance is the object,or one of the main objects, of the exercise. Companies that enter into schemes with the primary aim of avoiding tax will inevitablybe aware of that. The transactions we are aiming at are not ones which companies stumbleinto inadvertently. As one top tax adviser said recently, companies will know when theyare into serious tax avoidance; apart from anything else, they are likely to be paying fatfees for clever tax advice and there will commonly be wads of documentation. The last thing I want to do, however, is set out a list of so-called acceptable orunacceptable activities. Borrowing for commercial purposes can be structured in a highlyartificial way in order to avoid tax. If we said that borrowing for certain types of activitywould always be okay, tax advisers would quickly take advantage and devise artificialfinancial arrangements simply to avoid tax. Provided that companies are fundingcommercial activities or investments in a commercial way, they should have nothing tofear. If they opt for artificial, tax-driven arrangements, they may find themselves caught.

160 Author’s footnote: The reader may not agree.

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It is clear that a balance must be struck between meeting the concerns that have beenraised and weakening the provision in those instances where it needs to apply, but I canassure my hon. Friends that we shall keep the matter under review.’ (Hansard 28 March1996 Finance Bill Report Stage, Columns 1192-1193.)

The reader may think that is rather shallow.

CFM38180 Transactions Not Normally Within ‘Unallowable Purposes’ [Nov 2019]When CTA09/SS441-442 will not normally applyS441-442 will not normally apply to loan relationship debits: • simply because a company is able to obtain relief for the same expenditure or loss on

the borrowing to which the debits relate in more than one jurisdiction. However, S441-442 would apply where the structure that has been adopted has one or more non-commercial features (so that the loan relationship can be said to have an unallowablepurpose) and/or where, taking account of the overall position of the company or group,relief for interest and other finance costs might otherwise be available more than oncein the UK in respect of the true economic costs of the borrowing;

• that relate to a borrowing from an exempt body (such as a pension fund), even if thatexempt body is connected with the borrower, provided the arrangements arecommercial;

• that relate to a straightforward borrowing by a UK plc in order to fund a repurchase ofits shares provided that there are no attempts to structure the arrangement in such a wayas to provide a tax advantage for any other person and/or the amount borrowed (thelevel of gearing up) is dictated by market forces and hence is at arm’s length;

• that relate to a third party borrowing undertaken by one group member, that fulfils thecommercial borrowing requirements of the group, which it on-lends interest-free (or ata rate not exceeding the costs of the third party borrowing) to other UK-resident groupmembers. In such circumstances, S441-442 would not apply, provided that the groupgets one and only one deduction in the UK for the costs associated with the trueeconomic cost of the borrowing. For example, S441-442 will not normally apply whereintra-group interest-free loans are made primarily to enable borrowings to be matchedwith assets within the meaning of CTA09/S317; or

• where a loan relationship debit in one group company is matched by an equal andopposite loan relationship credit, which is fully taxed, in another group company for thesame loan relationship and the funding is not then utilised to secure a tax advantage. Onthe other hand, S441-442 are potentially in point if the main or one of the mainpurposes of the intra-group funding is to achieve a tax advantage for the group as awhole, in that the loan relationship credit on the intra- group funding is in some wayshielded from tax. An example of the loan relationship credit being shielded would bethe soaking up of otherwise stranded surplus expenses of management etc. Where theloan relationships involve cross-border transactions, thin capitalisation and transferpricing legislation as well as the provisions of the Double Taxation Treaties may beapplicable.

CFM38190 Transactions Normally Within ‘Unallowable Purposes’ [Nov 2019]When CTA09/SS441-442 will normally applySS441-442 would normally apply to loan relationship debits: • which, subject to the comments at CFM38180 (fourth and fifth bullets), relate to the

write-off of loans where the purpose of the loans was not amongst the business or other

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commercial purposes of a company. An example of a loan of this nature would be aninterest-free loan made by a company, whose business consists in operating a widgetsretail outlet, which had lent the money to a football club supported by one of thedirectors of the company for the purpose of providing financial support to the footballclub. Furthermore, if the company borrowed to make the loan to the football club, thenSS441-442 would normally also apply to disallow the loan relationship debits relatingto the interest or other finance costs on that borrowing. If, however, the purpose of theloan included a commercial or other business purpose such as advertising, then thiswould be taken into account in arriving at the amount attributable to the unallowablepurpose on a just and reasonable basis (S441(1)-(3));

• which, subject to the comments at CFM38180 (fourth and fifth bullets), relate to aborrowing the proceeds of which are used in such a way that the company cannot ordoes not expect to make an overall pre-tax profit. An example would be where acompany borrows at interest and on- lends at a rate of interest that is less than the rateof interest on the borrowings; or

• where a company or a group of companies enters into one or more transactions orarrangements which have the main purpose or one of the main purposes of securing loanrelationship debits for repayments of loan principal, in addition to payments of interest,on the true economic commercial borrowing to the company or group. An example ofthis would be where one group company undertakes a borrowing of £20 million at 8.4%for 5 years from a third party and at the same time a second group company pays thatthird party £13 million for preference shares of £20 million in the first group companyto be delivered 5 years later. The effect of this is that, economically, the group borrows£7 million on an amortising basis at 8.4% but for tax purposes the group claims reliefas loan relationship debits for both the interest of £1.4 million on the group amortisedborrowing of £7 million and the repayment of the £7 million loan principal. In suchcircumstances SS429-430 are likely to apply to disallow the amounts equivalent torepayments of principal.

2.11.4 Tax advantage: Case law

The TAAR guidance above is soundly based on TiS case law. The leadingcase is IRC v Parker:

The paragraph, as I understand it, presupposes a situation in which [1] an assessment to tax, or increased tax, either is made or may

possibly be made, [2] that the taxpayer is in a position to resist the assessment by saying

that the way in which he received what it is sought to tax preventshim from being taxed on it;

[3] and that the Crown is in a position to reply that if he had receivedwhat it is sought to tax in another way he would have had to beartax.

In other words, there must be a contrast as regards the “receipts”between [a] the actual case where these accrue in a non-taxable way with

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[b] a possible accruer in a taxable way, and unless this contrast exists, the existence of the advantage is notestablished.161

In the following discussion:(a) The actual case, where the receipt accrues in a non-taxable way, is the

“actual receipt”(b) The “possible accruer in a taxable way” is the “comparator”,

(sometimes called the “hypothetical receipt”)

The comparator need not be received as a result of the same kind oftransaction as did the actual receipt. IRC v Cleary162 concerned a sharesale: the shareholder sold shares to a company for cash. The actual receiptof the proceeds of sale was not income-taxable. The comparator was apossible dividend from the company (which would have been income-taxable). So there was a “tax advantage”.163 A dividend and a sale aredifferent types of transaction. The dividend would reduce the company’sassets available for distribution (unlike the actual sale). That did notmatter. So in short, the question was whether the company can pay adividend to the shareholder equal to the amount which the shareholderreceived tax-free.

The comparator must involve receipt of the same asset as the actualreceipt. Anysz v IRC164 concerned a share for share exchange: theshareholder transferred shares in A Ltd to another company (B Ltd) inexchange for an issue of shares in B Ltd. B Ltd could have declared acash dividend, but cash was not a valid comparator to the actual receipt ofB Ltd shares. However A Ltd could have:(1) bought B Ltd shares, and (2) distributed them to the shareholder by dividend in specie.

That was a valid comparator. Hence the shareholder obtained a “taxadvantage”.

2.11.5 Tax advantage/avoidance compared

On a natural reading,“tax advantage” in the standard sense is wider than

161 43 TC 396 at 441 (emphasis added).162 44 TC 399 at p.423. For TiS aspects of this case, see 55.10.1 (Sale of close co to

close co). 163 At that time the standard IT/CGT definition applied to both IT and CT TiS codes.164 53 TC 601.

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tax avoidance. Tax advantage includes a relief from or repayment of tax,as well as the avoidance or reduction of a charge to tax. The concept thusincludes both tax avoidance and mitigation.

In Marwood Homes v IRC:

Taking steps to obtain relief under s 242 [ICTA 1988] followingpayment of a dividend outside a group election is clearly within thespirit of the ACT code in the tax legislation. But the fact that atransaction has been carried out to achieve a benefit conferred by astatutory provision will not of itself exclude the application of [the TiS rules]. This follows from the definition of tax advantage in [what is nows.732 CTA 2010] which covers both everyday tax planning andtransactions, such as traditional dividend stripping, which fall moreobviously within the mischief that [the TiS code] was introduced tocounteract. The only safeguards available to the taxpayer are theclearance procedures and the escape clause [motive defence]. It cannottherefore avail Marwood to rest its case on the simple proposition thatthe dividends ... were directly within the spirit of s 242.165

That concerns the meaning of “tax advantage” in the TiS code, wherespecial principles of construction apply.166

The same approach was taken in the context of DOTAS.167

Nevertheless, the context of some TAARs may show otherwise. HMRCguidance on TAARs often adopts an avoidance test.168

2.12 Naming and shaming

“Naming and shaming”: The alliteration is irresistible, and for somereason sounds more reputable than just “shaming”, which is what thistopic is about.

The expression covers a variety of arrangements.

2.12.1 Statutory naming & shaming

Statutory “naming and shaming” was introduced by s.94 FA 2009. Thisprovides:

165 [1999] STC (SCD) 44 at [20].166 See 55.1.1 (Construction of TiS code).167 HMRC v Hyrax Resourcing Ltd [2019] UKFTT 175 (TC) at [151] - [161]. But the

arrangement in that case did constitute tax avoidance in the strict sense, so the issue did not need to be decided.

168 See 68.21.5 (“Genuine” loss and the TAAR).

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(1) The Commissioners may publish information about any person if—(a) in consequence of an investigation conducted by the

Commissioners, one or more relevant tax penalties169 is found tohave been incurred by the person, and

(b) the potential lost revenue170 in relation to the penalty (or theaggregate of the potential lost revenue in relation to each of thepenalties) exceeds £25,000.

(4) The information that may be published is—(a) the person’s name (including any trading name, previous name

or pseudonym),(b) the person’s address (or registered office),(c) the nature of any business carried on by the person,(d) the amount of the penalty or penalties and the potential lost

revenue in relation to the penalty (or the aggregate of thepotential lost revenue in relation to each of the penalties),

(e) the periods or times to which the inaccuracy, failure or actiongiving rise to the penalty (or any of the penalties) relates, and

(f) any such other information as the Commissioners consider itappropriate to publish in order to make clear the person’sidentity.

(4A) Subsection (4B) applies where a person who is a body corporateor a partnership has incurred—

(a) a penalty under paragraph 1 of Schedule 24 to FA 2007 inrespect of a deliberate inaccuracy which involves an offshorematter or an offshore transfer (within the meaning of paragraph

169 Defined s.94(2) FA 2009: “A "relevant tax penalty" is—(a) a penalty under paragraph 1 of Schedule 24 to FA 2007 (inaccuracy in

taxpayer’s document) in respect of a deliberate inaccuracy on the part of theperson,

(b) a penalty under paragraph 1A of that Schedule (inaccuracy in taxpayer’sdocument attributable to deliberate supply of false information or deliberatewithholding of information by person),

(c) a penalty under paragraph 1 of Schedule 41 to FA 2008 (failure to notify) inrespect of a deliberate failure on the part of the person, or

(d) a penalty under paragraph 2 (unauthorised VAT invoice), 3 (putting product touse attracting higher duty etc) or 4 (handling goods subject to unpaid exciseduty) of that Schedule in respect of deliberate action by the person.”

170 Defined s.94(3) FA 2009: “"Potential lost revenue", in relation to a penalty, has themeaning given by—(a) paragraphs 5 to 8 of Schedule 24 to FA 2007, or(b) paragraphs 7 to 11 of Schedule 41 to FA 2008,in relation to the inaccuracy, failure or action to which the penalty relates.”

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4Aof that Schedule), or(b) a penalty under paragraph 1 of Schedule 41 to FA 2008 in

respect of a deliberate failure which involves an offshore matteror an offshore transfer (within the meaning of paragraph 6A ofthat Schedule).

(4B) The Commissioners may publish the information mentioned insubsection (4) in respect of any individual who—

(a) controls the body corporate or the partnership (within themeaning of section 1124 of CTA 2010) [strict-sense control],and

(b) has obtained a tax advantage171 as a result of the inaccuracy orfailure.

(4C) Subsection (4D) applies where one or more trustees of a settlementhave incurred—

(a) a penalty under paragraph 1 of Schedule 24 to FA 2007 inrespect of a deliberate inaccuracy which involves an offshorematter or an offshore transfer (within the meaning of paragraph4A of that Schedule), or

(b) a penalty under paragraph 1 of Schedule 41 to FA 2008 inrespect of a deliberate failure which involves an offshore matteror an offshore transfer (within the meaning of paragraph 6A ofthat Schedule).

(4D) The Commissioners may publish the information mentioned insubsection (4) in respect of any trustee who is an individual and who hasobtained a tax advantage as a result of the inaccuracy or failure....(6) Before publishing any information about a person under subsection(1) the Commissioners—

(a) must inform the person that they are considering doing so, and(b) afford the person reasonable opportunity to make representations

about whether it should be published.(6A) Before publishing any information about an individual undersubsection (4B) or (4D), the Commissioners—

(a) must inform the individual that they are considering doing so,and

(b) afford the individual reasonable opportunity to makerepresentations about whether it should be published.

(7) No information may be published before the day when the penaltybecomes final (or the latest day when any of the penalties becomesfinal).

171 The GAAR definition of tax advantage applies; see s.94(16) FA 2009: “In thissection ... "tax advantage" has the meaning given by section 208 of FA 2013.”

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(8) No information may be published for the first time after the end ofthe period of one year beginning with that day (or that latest day).(9) No information may be published (or continue to be published) afterthe end of the period of one year beginning with the day on which it isfirst published.(10) No information may be published if the amount of the penalty isreduced under—

(a) paragraph 10 of Schedule 24 to FA 2007, (aa) paragraph 10A of that Schedule to the full extent permitted

following an unprompted disclosure,(b) paragraph 13 of Schedule 41 to FA 2008, (reductions for

disclosure) to the full extent permitted, or(c) paragraph 13A of that Schedule to the full extent permitted

following an unprompted disclosure.(11) For the purposes of this section, a penalty becomes final—

(a) if it has been assessed, when the time for any appeal or furtherappeal relating to it expires or, if later, any appeal or final appealrelating to it is finally determined, or

(b) if a contract is made between the Commissioners and the personunder which the Commissioners undertake not to assess thepenalty or (if it has been assessed) not to take proceedings torecover it, at the time when the contract is made.

We have seen the usual mission creep. The House of Lords say:

Naming and shaming provisions have subsequently been introduced toallow HMRC to publish the names of large corporations whosebehaviour is consistently uncooperative and of promoters andparticipants in failed avoidance schemes.114. The extension of the naming sanction to taxpayers and promoterswhose behaviour is legal, but of which HMRC disapproves, blurs animportant boundary between those who break the law and those who donot.115. We recommend that naming and shaming provisions should berestricted to those who have broken the law.172

But no-one has taken any notice of that.

2.12.2 Media naming/shaming

172 House of Lords Economic Affairs Committee “HMRC: Treating Taxpayers Fairly”(2018)https://publications.parliament.uk/pa/ld201719/ldselect/ldeconaf/242/242.pdf

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The greatest concern is unregulated shaming in the media. The OUCBT paper provides:

... searching for individual or corporate villains will not assist inremedying the underlying problems... Even if public naming and shaming influences a few taxpayers in thepublic eye to impose their own voluntary constraints, it will notnecessarily affect the worst avoiders, and may even encourage somenon-compliance from those who feel that “everyone is at it”. Onlyunderstanding the flaws in the tax system and working on seriouschanges can give long-term results....Even if that were to have an effect on one taxpayer it would not tacklethe underlying issues.

No-one has taken any notice of that! Shaming is at present common for various purposes (more than one may

be present at the same time):(1) In marketing: To sell newspapers with exposures of celebrities who

have been involved in tax avoidance schemes.173 (2) In politics, to knock the opposition by alleging that politicians, or

other party supporters, are guilty of tax avoidance. In this respect,anything goes and some stories have been farcical. Thus in 2015Mandelson was berated for taking a loan from a UK company.174 EdMiliband was accused of avoiding tax by means of a deed ofvariation.175 The allegations are so off-target as to cast doubt the goodfaith of those who make them and newspapers which uncriticallypromote them.

(3) As a scandalisation technique, to promote the view that avoidance isimmoral; often combined with juxtaposition of avoidance and evasionand the suggestion that there is little or no difference.

When these allegations are made it is impossible to defend oneself. So public debate is not uninformed but misinformed. It is a yeasty

173 Typically film schemes, as the names of members of the LLPs concerned are in thepublic domain.

174 http://www.theguardian.com/politics/2015/jan/27/peter-mandelson-400000-pound-tax-free-loan The Guardian later amended its website to concede that the loan hadbeen wrongly described as tax-free.

175 Leading to a gibe in the Spring 2015 budget announcing a policy review deeds ofvariation. The Guardian rightly asked: what came first – the policy or the joke?

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mingling of dimly understood facts with vague but deep impressions, andimages, half real, half fantastic. It has more than its fair share ofmisunderstanding and jejune polemics.

In these circumstances, public shaming may quickly lead away from theRule of Law. Starbucks paid £20m following a threat to occupy itscafes.176 If one calls that payment “taxation” at all, it was certainly nottaxation imposed by law. A hostile commentator would call this taxationby mob rule. Google and Amazon, who do not have public premisesvulnerable to the same threat, have not had to pay similar sums.

2.13 Avoidance: Multinationals

Much attention has been given to multinational companies. The PublicAccounts Committee looked at Starbucks, Amazon and Google. Theverdict was guilty.177

It is not possible to comment sensibly on the taxation of any multi-national group without knowing the relevant facts, which are not usuallyin the public domain. The claim that these companies have avoided UKcorporation tax is often based on the size of their UK sales or UK staff, setagainst the corporation tax actually paid. But all well-informedcommentators know that corporation tax is not a tax on sales, or the sizeof an establishment, and large sales/staff does not mean large profits. TheOUCBT paper provides:

Starbucks and Facebook ... have been criticized for not paying tax wherethey are making sales, but sales are not the basis for the corporation tax,so this alone is no cause for criticism of the companies concerned. Wecould argue that the tax base should change, but unless and until thatoccurs, the fact that there is a high turnover but no taxable profit is notin itself an indicator that the taxpayer is behaving in an unreasonable

176 Ironically, the post-tax cost of the payment would have been diminished as it shouldin principle be deductible in computing taxable profits.

177 Or was it? “We were not convinced that their actions, in using the letter of tax lawsboth nationally and internationally to immorally minimise their tax obligations, aredefensible.” Public Accounts Committee 19th report 2012, para 12. If theconvoluted wording was intended to reflect a note of caution, it was lost in thepublic debate. But I think the obfuscation is just the dialect of politics.The PAC returned to this theme in Ninth Report of Session 2013–14 “TaxAvoidance–Google”. A PAC hearing is not, perhaps, well suited to ascertaining thefacts; it is not possible to ascertain from this whether the complaint of the PAC isthat Google have been conducting successful or unsuccessful tax avoidance.

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way.

Likewise the fact that relatively little CT is paid proves nothing. TheOUCBT paper provides:

The fact that there is little or no tax payable is not, however, conclusiveevidence that there is effective or ineffective avoidance. In some of thesecases, these companies are simply operating in accordance withincentives created by the international tax system and by domesticgovernments trying to attract economic activity into their jurisdictions.This the governments may do for non-tax reasons, or because thisactivity gives rise to forms of taxes other than those which are not beingcollected. ...

The IFS say:

A low corporate tax bill is not in itself therefore evidence of taxavoidance. Even if income appears high, there may be genuinely lowUK taxable profits if a firm has relatively high current expenditures orcan offset the effects of large investment expenditures or losses. The UKtax bill can also be appropriately relatively low compared with declaredincome if that income is the result of genuinely non-UK activities.

HMRC make the same point:

Globalisation means that multinationals have the opportunity to structuretheir business to take advantage of beneficial tax rules in differentcountries. Provided that this results in profits being taxed in line withwhere genuine economic activity is carried on, this does not amount totax avoidance. ... In broad terms, companies are required to paycorporation tax in the country where they carry on the economic activitythat generates their profits, not where their customers are located.178

Unusually, the facts are known in relation to Apple as a result of UScongressional hearings (I suspect, better conducted than the UKequivalent). These have been well analysed by Antony Ting.179 In short,there is no reason to think that Apple have avoided UK tax. The group hasavoided Irish/US tax by Irish/US hybrid companies; and, perhaps, it hasreduced Irish tax by informal transfer pricing agreements with the Irish

178 HMRC, “Taxing the profits of multinational businesses” Issue Briefing (2012)https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/89030/profits-multinationals.pdf

179 Ting, “iTax—Apple’s International Tax Structure and the Double Non-TaxationIssue” [2014] BTR 40. See 103.1 (Hybrid entities).

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Revenue.

2.13.1 Transfer pricing

It is often said that multinationals engage in avoidance through transferpricing. For instance, Christian Aid say:

There is debate about the extent to which companies engage in trademispricing (artificially suppressing the income they earn from activitiessuch as resource extraction, to reduce payments to government), but fewwould doubt that it has a significant impact on the incomes of

governments in the global South.180

Transfer pricing is not strictly avoidance. It is in principle in the categoryof ineffective avoidance:

We may well question whether the transfer pricing rules are adequate,... but these are considerations relating to tax policy reform and not totax avoidance.

The fundamental problem is not terminology, but that the facts needed toassess these claims are not in the public domain. Robert Maas says:

The Public Accounts Committee believes that Starbucks overpays for itscoffee. I am not an expert on the economics of coffee, but I am a bitpuzzled that the PAC members consider themselves sufficientlyknowledgeable in this area to be able to pass judgment (sorry, to expressscepticism).The committee thinks that a 16.67% margin to a company that sourcesand buys coffee throughout the world, exercises quality control andworks with local farmers, is excessive. Personally, I do not but then Idon’t have any expertise in coffee.The PAC also believes that the rate of interest on the inter-companyloan from the US company (4.9%) is excessive, “at a higher rate thanany similar loan we have seen”. I do not know what similar loans thecommittee has seen, ie a loan to a loss-making business with little asset

backing. I must say it looks modest to me...181

If transfer pricing is conducted with the consent of the tax authorityconcerned, it is not avoidance, though it may be unfair tax competition.

180 Christian Aid, “Tax for the common good (2014)http://www.christianaid.org.uk/images/Tax-Morality-Report-J2951.pdf

181 Maas, Taxation Magazine, 27 February 2013.

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The EC are currently pursuing state aid rules;182 it will be interesting to seewhat results.

2.13.2 GAAR

The GAAR guidance provides:

Many of the established rules of international taxation are set out indouble taxation treaties. These cover, for example, [1] the attribution of profits to branches or between group companies of

multi-national enterprises, and [2] the allocation of taxing rights to the different states where such

enterprises operate. The fact that arrangements benefit from these rules does not mean thatthe arrangements amount to abuse, and so the GAAR cannot be appliedto them. Accordingly, many cases of the sort which generated a greatdeal of media and parliamentary debate in the months leading up to the

enactment of the GAAR cannot be dealt with by the GAAR.183

In my terminology, these issues are non-avoidance, and in some cases, taxavoidance, but not tax abuse.

But where there is abuse, one country’s domestic GAAR cannot resolvethe issue. Apple’s planning, for instance, turned on a hybrid entity:(1) transparent under Irish tax law, and so not paying tax on its profits in

Ireland;(2) opaque in US tax law, and so not paying tax on its profits in the US.

CIOT say:

As in much of the BEPS project, this is not a case of tax avoidance aspreviously understood; there can be no avoidance where there is nointent to tax in the first place.184

If avoidance is action contrary to the intention of a Parliament, then thiskind of planning may properly be described as tax avoidance if it is the

182 See 75.19 (State Aid).183 HMRC, “GAAR Guidance” (2017) para B5.2

https://www.gov.uk/government/publications/tax-avoidance-general-anti-abuse-rules.The House of Lords Select Committee made the same point

184 CIOT, “BEPS Action 2: Neutralise the effects of hybrid mismatch arrangements(Recommendations for domestic laws) Response by CIOT (May 2014)https://www.oecd.org/ctp/aggressive/comments-action-2-hybrid-mismatch-arrangements.pdf

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2.68 Tax Avoidance

case that:(1) The intention of Oireachtas is that the entity’s income should be taxed

in the US, and (2) The intention of US Congress is that the entity’s income should be

taxed in Ireland.

One might refer to it as international tax avoidance (though there is ofcourse no such tax as “international tax”). The tax advantage is notcontrary to the tax policy of either country in isolation; it is the result ofa gap between the two.185 In this case, the gap may in fact be intentional,in that both Ireland and the US deliberately chose to facilitate theplanning;186 in which case the planning should not be called avoidance atall.

Whatever the terminology, CIOT are right to say that the tools to dealwith multinational planning/avoidance will not be the same as those usedfor domestic tax avoidance. It is an international problem which onlyinternational consensus can resolve. Hence the OECD BEPS project.

We should never lose sight of the fact that public debates about taxavoidance are simultaneously fiscal, moral and political debates, raisingissues of equality, redistribution, class, and tax competition; and sensitiveears may also detect elements of xenophobia.

This file contains Ch apter 2, Taxation of Non-Residents and Foreign

Domiciliaries by James Kessler QC (chapter version date: 15.4.2020) Note:

Cross references work as links on the online version of this chapter, but do

not work in this pdf file.

185 See de Boer & Nouwen (eds) The EU’s struggle with Mismatches and AggressiveTax Planning (2013), para 3.5.2 (General anti-abuse rule).

186 Ting, “Old wine in a new bottle: Ireland’s revised definition of corporate residenceand the war on BEPS” [2014] BTR 237.

Page 69: TAX AVOIDANCE - Mankin · 2020. 4. 15. · Tax Avoidance 2.3 current use of the words avoidance/evasion in the modern sense originated in the USA where it was established by the 1920s.6

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